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PRINCIPLES OF 
NATIONAL ECONOMY 



BY 



THOMAS NIXON CARVER 




GINN AND COMPANY 

BOSTON • NEW YORK • CHICAGO • LONDON 
ATLANTA • DALLAS • COLUMBUS • SAN FRANCISCO 



COPYRIGHT, 1921, BY THOiVIAS XIXOX CARVER 

ENTERED AT STATIONERS' HALL 

ALL RIGHTS RESERVED 

621. Q \ 



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GINN AND COMPANY • PRO- 
PRIETORS • BOSTON • U.S.A. 



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INTRODUCTION 

This book is frankly written from the national point of view. 
Someone has suggested that much futile discussion would be 
prevented if everyone were required to point at the thing of 
which he was talking. It would be a wise rule if no one would 
ever speak or write about ^^ society," or ^Hhe community" in 
general, but only of such groups as can be named and located. 
The United States of America is such a group. So also are 
England, France, Canada, and a number of others. These and 
similar groups are the largest that are capable of carrying 
through definite economic policies. 

Not only is this book written from the national point of 
view ; it is frankly a theory of national prosperity. In this 
respect the author has the illustrious example of the great 
Adam Smith, whose work was entitled "An Enquiry into the 
Nature and Causes of the Wealth of Nations." Prosperity is 
assumed to be desirable and worthy of the highest efforts of the 
scholar in economics as well as the statesman. It is believed 
to require not only an ample production but also a fair distri- 
bution of the products among all classes, to the end that all may 
share in the national prosperity. 

The writer may be accused of bringing purely ethical con- 
siderations into an economic discussion. He has no desire to 
repudiate the charge, certainly not on the ground that ethical 
considerations are unworthy of an economist. The charge, 
however, does not happen to be correct, unless a preference 
for national prosperity as against national poverty can justly be 
called an ethical preference. The author pleads guilty to this 
preference, and the book is written as an expression* of it. 
Having this preference, the author frankly argues for those 



iv PRINCIPLES OF NATIONAL ECONOMY 

habits, policies, and institutions which are most likely to con- 
tribute to national prosperity. Assuming that others have the 
same preference, the language used may sometimes be that of 
a propagandist, and the reader may even be exhorted to behave 
in such ways, or to support such policies and institutions as 
will contribute to the end which all are assumed to desire. 
These exhortations, however, are based wholly on reasoning 
as to the probable effect on national prosperity of the habits, 
policies, and institutions under discussion, and never on senti- 
mental views of morality. 

Let it be understood, therefore, that this book is written for 
those who are interested in the problem of national prosperity 
and who believe that this should be the aim of all good 
citizenship. It is also written for those who are not too 
squeamish to consider moral questions whenever they can be 
shown to have a definite connection with the central problem 
of national prosperity. Finally it is written for the studiously 
inclined and not for those who merely wish to find support for 
their prejudices. 



CONTENTS 

PART I. THE FACTORS OF NATIONAL PROSPERITY 

CHAPTER y PAGE 

I. What makes a Nation Prosperous 3 

II. Economic Desires 15 

III. Economic Goods . . .^ 38 

IV. Economic Activities . ."^ 47 

V. Control of Economic Activities 72 

VI. Economic Institutions loi 

VII. The Quality of the People y • • 123 

VIII. The Geographical Situ.^tion K ^ 141 

PART II. ECONOMIZING THE FACTORS OF PRODUCTION 

IX. The Interrelation of the Factors of Production . . 153 

X. Economizing Labor by the Division of Labor .... 166 

XI. Economizing Labor by the Use of Power 180 

XII. Economizing Labor by the Use of Capital 189 

XIII. The Relation of Thrift to Nation Building .... 203 

XIV. Forms of Business Organization 213 

XV. Economical Use of L.\bor on L.and 226 

XVI. Economizing Land 241 

XVII. The Balancing of the Factors of Production . . . . 256 

PART III. THE PRODUCTIVE INDUSTRIES 

XVIII. The Extractive Industries . . . ; 267 

XIX. The Genetic Industries 278 

XX. The Manufacturing Industries 290 

XXI. Transportation 303 

XXII. Merch.'^ndising 3^5 

XXIII. Personal and Professional Services 324 

PART IV. EXCHANGE 

XXIV. What is Value? 335 

XXV. What determines the Value of a Thing 343 

XXVI. Scarcity 354 

V 



vi PRINCIPLES OF NATIONAL ECONOMY 

CHAPTER PAtJE 

XXVII. Money 364 

XXVIII. Banking 394 

XXIX. Marketing 416 

XXX. Economic Crises 427 

XXXI. Free Trade 443 

XXXII. Protectionism 453 

PART V. DISTRIBUTION 

XXXIII. The Law of Variable Proportions 471 

XXXIV. The Problem ojf Distribution . 484 

XXXV. What determines the Rate of Wages ? 494 

XXXVI. The Organization of Laborers 506 

XXXVII. The Rent of Land 515 

XXXVIII. The Desirability of Capital and its Relation to 

Interest 526 

XXXIX. The Cost of Capital and its Relation to Interest . 537 

XL. Profits 551 

PART VI. CONSUMPTION 

XLI. Meaning and Importance of Consumption .... 565 

XLII. Rational Consumption . . 572 

XLIII. Luxury 584 

XLIV. The Control of Consumption ' . 598 

XLV. The Battle of the Standards 608 

PART VII. PUBLIC FINANCE 

XLVI. Taxation 619 

XLVII. The Shifting of Taxes 630 

XLVIII. The Minimum Sacrifice Theory of Taxation . . . 645 

XLIX. The Financing of a War 661 

PART VIII. REFORM 

L. Labor Programs 679 

LI. Socialism 697 

LII. Communism 713 

LIII. Anarchism 723 

LIV. The Single Tax 731 

LV. The Limits of State Interference 740 

LVI. Constructive Liberalism 750 

INDEX 769 



PRINCIPLES OF NATIONAL ECONOMY 

PART I. THE FACTORS OF NATIONAL 
PROSPERITY 



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CHAPTER I 

i/ 
WHAT MAKES A NATION PROSPEROUS 

Why the study of economics is important. Economics would 
have little interest for the serious student if it did not throw 
light upon the conditions of national prosperity and the meth- 
ods of promoting it. National prosperity is generally under- 
stood to depend largely, if not mainly, upon business in its 
widest sense. The student is sometimes tempted, therefore, to 
begin the study of economics with an examination of the 
peculiarities of some of the large business establishments and 
business methods of the present day. These, however, are 
highly complex affairs, besides being the result of a long process 
of development from simpler beginnings. There is also a temp- 
tation to begin with a historical study of these simpler be- 
ginnings, but, because of lack of evidence, it is much harder 
to find out what business was like a few centuries ago than 
to find out what it is like today. The way to begin the study 
of economics is to analyze the business of getting a living and 
reduce it to its simplest elements. In this way we shall find 
what elements all business — large and small, primitive and 
modern — have in common before undertaking the study of 
the special peculiarities of different kinds of business. 

The primary purpose of the business man, as well as of all 
those who work with or for him, and others who work inde- 
pendently, is to increase his own prosperity. Under a properly 
organized industrial system, however, no one can increase his 
own prosperity except by some method that tends also to in- 
crease the prosperity of the whole nation. If there is a single 
case where this is not true (that is, if there is a case in which 
anyone can prosper by any method or practice that does not 



4 PRINCIPLES OF NATIONAL ECONOMY 

add or tend to add something to the prosperity of the whole 
country) there is an obvious defect in the laws or the organiza- 
tion of industry. This defect must be corrected if the nation 
is to attain its highest prosperity. The more such defects there 
are, the less the nation can prosper ; and the fewer there are, 
the more it can prosper. Before we are in a position to correct 
such defects or even to know whether they exist or not we 
must have a pretty clear understanding of the conditions of 
national prosperity and the things which promote or hinder it. 
Ways of getting wealth. The prosperity of a nation, like that 
of an individual, depends, in the most general sense, upon how 
many useful things and services it can manage to get. To have 
little and be satisfied with little may bring contentment, and 
contentment may be as desirable as riches or wealth, but it is 
not riches nor wealth. A peaceful nation may get those things 
that are called wealth (i) by finding and appropriating them, 
(2) by making or producing them, or (3) it may get them from 
other nations in peaceful and voluntary exchange, provided it 
can find or produce within its own borders things that can be 
given in exchange. 

How many useful things it may find within its own borders 
will depend partly upon how rich its land is in what are called 
/ natural resources — such as soil, minerals, forests, water power, 
grass, and a multitude of other things — and partly upon how 
active and intelligent its people are in searching for these things. 
How many useful things it can make will depend mainly upon 
how active, intelligent, and skillful its people are in all the arts 
of production and how thrifty and enterprising they are in de- 
signing, buying, and utilizing tools and other instruments of 
production. How many things it can get from other nations 
will depend primarily upon how many things it can find and 
produce to give in exchange, how favorably it is situated 
geographically for carrying on trade with other nations, and 
partly also upon how wise and enterprising its people are in 
learning the needs and desires of other nations and in adopting 
sound methods of carrying on international exchanges. 



WHAT MAKES A NATION PROSPEROUS 5 

The problem of national prosperity is, however, by no means 
so simple as it may seem from this general way of stating it. 
It is infinitely complicated, so much so that when the student 
begins to study it he is in danger of being bewildered by a vast 
number of details. There are certain general principles which 
help to avoid this bewilderment. It is necessary, therefore, to 
begin at the beginning and study some of these principles. 

)/ Economy. It is generally understood that economy has 
something to do with prosperity; but what is economy, and 
what does it mean to economize ? In its original sense to econ- 
omize meant to manage a household. The word '^economics" 
is derived from two Greek words, oIko<;, "a house," and ve/xco, 
''manage." Nowadays the study of the management of a 
national household is not inappropriately called national econ- 
omy or, more generally, political economy. Its purpose is to 
find the answer to the question at the head of this chapter — 
What makes a nation prosperous ? It appears, therefore, that 
the words "economy," "economics," and "economize," as they 
are understood today, have a wider meaning than the manage- 
ment of a private household. 

^ What it means to economize. In its simplest sense to econo- 
mize is to choose! among several different things which one 
would like to have, giving up the things for which one cares less 
in order to have those for which one cares more. Necessity 
forces this kind of choosing not only upon individuals but also 
upon communities and nations. 

This choosing of what one will have takes on many and vari- 
ous forms and takes place many times every day in the life of 
every normal person. One may have to choose between play 
and work or between different kinds of work, different kinds of 
play, or different objects which one might purchase with one's 
limited money or purchasing power. The problem is always 
how to use one's time, one's working power, or one's wealth in 
such a way as to accomplish the most in the promotion of one's 
interest or the fulfillment of one's hopes and purposes. This 
is a problem, however, not for the individual alone but for the 



6 PRINCIPLES OF NATIONAL ECONOMY 

community, the nation, and the world at large. The community 
and the nation, like the individual, have common interests 
which can be promoted only by common effort. How to use 
the energy of the community and of the nation economically 
(that is, in such a way as to accomplish the largest and best 
possible results) is a problem of the greatest possible impor- 
tance. In a democracy especially it is fully as important that 
the citizen should understand how the community and the 
nation may economize their energies and achieve the utmost 
in the way of civilization and well-being as it is that he should 
understand how he may economize his own individual energy 
and accomplish the utmost in the promotion of his own interest 
and the fulfillment of his own hopes. Moreover, the former is 
a vastly greater and more difficult problem than the latter. 
It will require a broad, careful, and systematic study of eco- 
nomic principles instead of a narrow, piecemeal, haphazard 
study of individual problems in economy. 

When you are asked to do a certain thing and you reply that 
you have not time, you are sometimes merely trying to be polite. 
You may really" mean that there is something else which you 
would rather be doing with your time or which you feel to be 
more important than the thing you are asked to do. In other 
words, you have not time and energy enough to do everything 
you would like to do or that others would like to have you do. 
You must leave many things undone, and you must, therefore, 
choose rather carefully the few things that you think most im- 
portant or that would cause you the most inconvenience or pain 
if left undone. In order that you may do these few and im- 
portant things you must refuse to do anything else that would 
interfere. That is what it means to economize time and energy. 
It is choosing to do the more important things, leaving the less 
important things undone. Economizing in the use of money is 
only one special form of economizing time and energy, since 
money represents the products of time and energy. 

Why we have to economize. In saying that you do not have 
time to do a certain thing you are stating one of the most funda- 



WHAT MAKES A NATION PROSPEROUS 7 

mental facts of life ; namely, the great and ever-present fact of 
scarcity. It is this fact which compels us to economize, which 
compels us to make our limited fund of energy and our limited 
time go as far as they will. To waste time or energy is to fail 
to supply ourselves with some of the things we want. To waste 
things that have already been produced is no worse than to 
waste the time and energy that might have produced more of 
the same things. 

Wasting time and energy does not necessarily mean remain- 
ing idle, though it may mean that. It may mean also the doing 
of less important things when there are more important things 
to be done. If one had unlimited time and energy, or if one had 
the time and energy necessary to do everything one would like 
to do, so that the doing of one thing never prevented the doing 
of anything else worth doing, economy would be unnecessary. 
If that were true, human life and human history would be very 
different from anything we now know, and this world would be 
so unlike the present world that none of us would recognize it. 

By the use of time and energy we find or produce goods and 
commodities ; that is, the material things which are the means 
of satisfying our desires. Therefore, when we say that we can- 
not afford a certain article we mean very much the same thing, 
fundamentally, as when we say that we have not time to do a 
certain thing. In both cases we are merely stating the great 
fact that it is necessary to economize, to choose what we will 
do with our limited energy or our limited money to the exclu- 
sion of other things. The fact that time and energy are in- 
sufficient to enable us to do everything that we might like to do 
makes it certain that we cannot produce everything that we 
should like to have and that, if we could, we should not have 
time to do something else. If we were to work all the time, we 
should have no time to play ; and everybody likes to play — that 
is, everybody worth mentioning. We must, therefore, choose 
whether to deprive ourselves of the opportunity to play in order 
to get certain goods that we want, or to reduce somewhat the 
number of goods we consume in order to have more time to 



8 PRINCIPLES OF NATIONAL ECONOMY 

play. Again, if one works too long on one kind of goods one 
has less time and energy left to produce others. At every step 
in the life of every normal human being, therefore, he is con- 
fronted with some problem in economy. 

As already stated, the necessity for economy grows out of the 
scarcity of something or other, — either the goods which are 
necessary to the satisfaction of our desires, or the time and 
energy necessary to produce those goods. Find an individual 
who experiences no lack or scarcity of anything and I will show 
you an individual who has no need for economy ; but you will 
look a long time before you find him. 

Getting and spending. In the practical, everyday life of the 
average person problems of economy are mainly focused on the 
problems of getting and spending, — of income and expenditure, 
or of business and the household. If one's income is less than 
one would like to have it, it means that one's desires run beyond 
one's income. Such an individual, therefore, tries, first, to in- 
crease his income and, second, to get as much good out of it as 
he can : that is, to spend it as wisely as he knows how. This 
is true not only of every individual and every family but also 
of every organization, even the state itself, and it is even true 
of all the people as distinct from their government. The greater 
part of the time and energy of the people in this world is spent 
on these matters, but it is spent in a great variety of ways. 

A glance at the diagram at the beginning of this chapter will 
give one a general idea of all the forms in which the problem 
of income and expenditure presents itself. The reader will get, 
at the same time, an idea of the principal branches of the great 
science of economics, for economics is, in one aspect, simply the 
study of the problem of income and expenditure, both of which 
are fundamentally problems in economy. In order to increase 
one's income one must economize one's time and working 
energy. In order to make one's income go as far as possible 
one must economize it, buying only the most important things 
and making them go as far as they can be made to go in the 
satisfaction of one's wants. In brief, economy of goods con- 



WHAT MAKES A NATION PROSPEROUS 9 

sists in trying to make things that are scarce go as far and 
accomplish as much as possible. 

Economics and household management. It was stated above 
that historically economics meant the management of a house- 
hold and that when the word was first used a household was a 
simple, self-sufficing household. In such a household the prob- 
lems of getting and spending, of income and expenditure, of 
business and home life, were not very distinct. The income was 
made up of the products of the farm and not of the money for 
which those products could be sold, because they were not sold, 
as a rule. There was practically no expenditure of money ; but 
the household used the things that were produced within it, 
since the farm was considered a part of the household. In 
this simple household, however, the fundamental problems of 
economy had to be worked out very much as they are in the 
modern business or the modern household. The working power 
of the household had to be very carefully economized. The 
economizing of the working power consisted, first, in keeping 
it active instead of allowing it to go to waste in idleness ; second, 
in directing it efficiently, so that as little effort as possible should 
be wasted by lost motion, poor tools, or inefficient and hap- 
hazard ways of doing things ; third, and quite as important as 
either of the others, in directing it wisely, or directing it toward 
the production of things of vital importance to the well-being of 
the household and not wasting it in the production of trivialities. 

Household management and national economy. In some re- 
spects the problems of the self-sufficing household more nearly 
resemble those of the modern nation than those of the modern 
business or the modern household. The prosperity of the na- 
tion requires the same forms of economy in production. The 
nation that wastes its time and working energy in idleness or 
leisure will, of course, fail to achieve its maximum prosperity. 
Likewise the nation whose people do things in inefficient ways, 
by slipshod methods, or with inadequate tools and equipment 
will fail to become as prosperous as it might become. In these 
two respects the private business of today and the nation's busi- 



# 



10 PRINCIPLES OF NATIONAL ECONOMY 

ness are much alike. In the third form of economy, however, 
there is some difference; a private business may prosper by 
producing frills and luxuries, sometimes even by pandering to 
vice. This could not be true of a self-sufficing nation any 
more than of a self-sufficing household of the primitive type. 
It is quite as important that the national energy be devoted to 
the production of important rather than of unimportant things 
as that the nation should be industrious or efficient in its 
methods of production. In other words, it is no greater waste 
of the nation's resources to have them remain idle than to have 
them misdirected or employed, however efficiently, in the pro- 
duction of useless things. Again, it is no more wasteful of the 
nation's resources to have its labor used very inefficiently by 
slipshod methods and poor tools than to have it engaged by the 
most efficient methods and the best possible tools in the produc- 
tion of useless or harmful commodities. 

In the primitive, self-sufficing household there was very little 
buying and selling within the household. In the modern self- 
sufficing nation there is a vast amount of buying and selling 
among its own citizens. The subject of exchange, therefore, 
forms a most important part of the economy of the nation but 
a negligible part of the economy of a self-sufficing household. 
Again, the problem of the sharing of the incorhe among the 
members of the household may have been a matter of some im- 
portance, but it could not have been nearly so important as it 
has become in the modern nation with its great diversities of in- 
terests and its wide separation of industrial classes and groups. 

Another important change has taken place in the household 
itself: whereas in the primitive, self-sufficing household the 
problems of getting and utilizing were very closely related, in 
the modern household they are very widely separated. In recent 
times, especially in our cities, what is called business has come 
to be regarded as the source of income, whereas the home is the 
place where the income is utilized. Business Hfe and home life 
are so distinct as frequently to be regarded as different and al- 
most unrelated fields of action. This separation of business 



WHAT MAKES A NATION PROSPEROUS ii 

from the home has given rise to a division of the field of private 
economics into two distinct parts, one of which is known as 
business economics, the other as home economics. That these 
two parts, which the Greeks regarded as the same subject, are 
now so widely separated shows that we have gone a long way 
from the primitive condition in which business and home life 
were united, and are approaching, if we have not already 
arrived, at a condition in which they are completely divorced. 
Whether this is, on the whole, a good tendency or only partly 
good and partly bad, is a very interesting and difficult problem. 
Public income and expenditure. But the problem of income 
and expenditure is a serious question for the public as a whole 
as well as for the private citizen. The state gets its income 
from different sources and by different methods from those 
pursued by the individual, but income is as necessary to a state 
as to a citizen. In order that its limited income may go as far 
as possible and accomplish the greatest possible good the ques- 
tion of public expenditure must be studied with the greatest 
care. It is scarcity in this case, as well as in the case of the 
individual, which makes economy necessary. If we could im- 
agine a state with an Unlimited income, — which we cannot, — 
so that when it spent money for one purpose it was not obliged 
to refrain from spending money for any other purpose, there 
would, of course, be no occasion for public economy. Xeno- 
phon, who wrote our oldest treatise under the title of '^ Eco- 
nomics," wrote also a treatise on '^The Revenues of Athens." 
In the former work he was well within the field of private eco- 
nomics, but in the latter he had got well over into the field of 
public economics. This branch of public economics, or political 
economy (that is, the branch which deals with the revenues and 
expenditures of the state, or with what has been called the 
housekeeping of the state), is commonly called public finance. 
It will readily be seen that there is a close resemblance between 
public finance, which deals with the income and expenditure of 
the government, and private economics, which deals with the 
income and expenditure of the private family. 



12 PRINCIPLES OF NATIONAL ECONOMY 

Social well-being. But there is another branch of public 
economics which is broader than public finance; that is the 
branch which deals with the general problem of social wealth 
or well-being. This branch deals neither with the income and 
expenditure of the individual family as such nor with those of 
the government as such. It deals rather with the income and 
expenditure of the people as a whole. This is called social 
economy or social economics. It is the most important study 
for the real statesman or nation builder. Since in a democracy 
everyone is a nation builder (in a small way at least), in that 
he helps to determine the policy of the nation, it is of the 
greatest possible importance that everyone should study the 
problems of social economy as well as those of public finance 
and private economics. 

The management of the king's household. A good illustration 
of the importance of this subject is found in the studies of a 
group of scholars who some hundreds of years ago were study- 
ing the problem of providing for the king's household. These 
were the finance ministers of certain kings of European coun- 
tries. They are now sometimes called the cameralists. Having 
charge of the affairs of the king's household, they were, in a 
sense, studying private economics; but since the king was a 
public functionary, deriving much of his revenue from taxation 
and other public sources and performing many of the acts of 
government, these finance ministers were, in another sense, 
studying public economics. At any rate, they were severely 
put to it to find revenue enough to pay the expenses of the royal 
household or to keep the expenses within the royal revenues ; 
that is, to balance income and expenditure. These were prob- 
lems in economy. How to get as large an income as possible 
with the limited energy at their disposal, and how to expend 
that income so as to add the maximum to the resources of the 
king's household, were very serious problems. 

The social income. The more they studied this problem the 
more clearly they saw that in order to increase the royal income 
the people over whom the king ruled must be made prosperous ; 



WHAT MAKES A NATION PROSPEROUS 13 

that is, the social income also must be increased. '' Poor people, 
poor king" came to be an axiom in public finance. Therefore 
attention was given to the problem of increasing the social 
income or of promoting the prosperity of all the people. Later 
writers have given their chief attention to this part of the 
problem. In the outline at the beginning of this chapter this 
is called social economy. 

Exchange. In one sense, as already pointed out, the social 
income is the annual production of the nation. So there was a 
tendency at first to give chief attention to the subject of pro- 
duction; but it was soon discovered that in social economy 
exchange was an important factor. In studying the internal 
economy of an individual household, whether a private or a 
royal household, exchange among the members could be left 
out of account ; but in studying the internal economy of a whole 
nation it could not be left out of account, for the obvious rea- 
son that the citizens of the nation did a great deal of exchanging 
among themselves. This is particularly true of the modern 
nations. Buying and selling have come to be so large a part of 
the economic life of the people that for a long time it seemed 
to many students to be the most important aspect of economic 
life. So there came a time when the chief emphasis was laid 
upon exchange rather than upon production. Indeed, it was 
assumed for a time that production would almost take care of 
itself ; that is, each individual would look after his own part 
in it if only the government would provide him safe and open 
markets and a convenient medium of exchange in the form of 
money and sound banking facilities. 

Distribution of social income. Still later another problem was 
discovered to be of equal or greater importance. Like the 
problem of exchange this was one which also could be ignored 
in the study of private economics. It is the problem of the 
division of the products of industry among the workers. When 
a large number of people take part in the production of a given 
commodity, say shoes, the question as to how much of the value 
of the shoes shall go to each person or group of persons is of the 



14 PRINCIPLES OF NATIONAL ECONOMY 

utmost importance in social economy. The farmer, the miller, 
and the baker, as well as the carrier, have all had something 
to do with the production of a loaf of bread. It is very im- 
portant to know how much of the value of the bread goes to 
each of those who have had a part in its production. This is 
called the problem of distribution ; as you will see, it is some- 
what different from the problem of exchange, though very 
closely related to it. Such questions as the wages of different 
classes of laborers, the rent of land, the interest on capital, the 
profits of enterprise, are parts of the general problem of dis- 
tribution. During the last fifty years, it is fair to say, more 
emphasis has been laid upon the subject of distribution than 
upon either production or exchange. 

V The utilization of the social income. While the consumption 
of the people has been recognized as the utilization of the social 
income, and therefore as a thing important in itself, yet students 
have almost ignored it as a branch of the science of economics. 
One reason has doubtless been the feeling that every individual 
would better be left to consume his income as he liked, whether 
he did it wisely or foolishly, beneficially or harmfully. Attempts 
to control or direct his consumption have been called sumptuary 
laws. By pronouncing these words with a wry face such at- 
tempts may be discredited, that is, for a time. Meanwhile, 
however, every progressive community has gone right on passing 
sumptuary laws, in one form or another, sometimes to the great 
advantage of the people, sometimes to their disadvantage. Stu- 
dents are, therefore, becoming convinced that the consumption 
of wealth merits a great deal of study, that it is going to be con- 
trolled and directed by the state whether we like it or not, and 
that whether it is controlled and directed wisely or unwisely 
will depend upon how carefully and intelligently it is studied. 
In fact, a few are already beginning to discover that consump- 
tion is more important than production, exchange, or distribu 
tion — possibly more important than all three combined. 



'H 



CHAPTER II 

ECONOMIC DESIRES 

Desires as motives. The purpose of economy is to enable us 
to secure the fullest possible satisfaction of our desires. The 
more desires we can satisfy, or the fewer we leave unsatis- 
fied, the more prosperous we become. These economic desires, 
moreover, furnish the constant motives to economic action, 
though they are supplemented by instincts, impulses, and other 
motives not so well understood. 

The need of an adequate motive. Whenever a new enterprise 
is proposed, whether in the field of business, politics, education, 
or philanthropy, one of the first questions that ought to be 
asked, after ascertaining that the purpose of the enterprise is 
a worthy one, is. Where is the motive ? or. Who has a sufficient 
motive for carrying it on? Many an excellent plan — excellent 
in other respects — has failed merely because no one had a 
sufficient motive lor spending the vast amount of time and 
energy necessary to make it succeed. New enterprises have to 
be nursed along and coaxed into success ; and no one will take 
the necessary pains unless he has a powerful and persistent 
motive. Sudden enthusiasms are soon spent, even the pleasure 
of doing something new wears out when the enterprise ceases to 
be new. Some motive is needed that does not wear out but 
renews itself every day. Physical wants have this quality, be- 
cause the human body requires constant supplies of goods. 

Transitory motives. Many of our impulsive and instinctive 
actions are desultory because as motives they are easily satisfied 
and are not self-renewing. Every spring, about the time the 
frost is out of the ground, nearly every man feels an impulse to 
dig. It seems as natural for him to dig at that time of the year 
as for the sap to run, the crocuses to push upward, geese to fly 

15 



1 6 PRINCIPLES OF NATIONAL ECONOMY 

northward, gr boys to play marbles. But this impulse is soon 
satisfied; and, unless some other and more persistent motive 
begins to function, every man will begin soon to neglect the 
garden so heroically begun. Many other impulses or instincts 
are about as ineffective as this one as motives for the con- 
tinuous toil and taking of pains that are necessary in modern 
production. 

Kinds of desires. There are at least three kinds of self- 
renewing desires that play an important part in our economic 
life or that supply us with motives for economic action — the 
desire for action, the desire for esteem, and the desire for mate- 
rial goods. All three show themselves very early in the lives of 
children and remain with them as long as they are in the land 
of the living. They function continuously and persistently as 
motives ; they do not wear out, but drive us all the time. They 
may seem like selfish desires ; but even benevolence is likely to 
take the form of desiring one or more of these things for others. 
The sympathetic person who enters into the thoughts and feel- 
ings of others, realizing that they desire these three things, is 
very likely to desire that they should have them. 

Desire for action. The desire for action results in play ; but 
there is an element of play in many kinds of work. In general, 
play may be defined as any action which is itself so pleasur- 
able as to provide a sufficient motive. Frequently, however, 
the desire for esteem adds to the strength of the motive for play, 
especially when a popular game furnishes an opportunity for 
the exhibition of prowess. Even the desire for pecuniary gain 
has been known to enter in; but this is generally considered 
bad sportsmanship. Work may be defined in general as any 
action which requires some other reward than the pleasure of 
the action. This does not mean that there is no pleasure what- 
ever in the action which we call work. It means simply that 
the play motive is not the only motive, generally not the chief 
motive, and sometimes, in the case of disagreeable work, no 
motive at all. Work, like play, is sometimes done partly to win 
the esteem of others. It is frequently done with that desire as 



ECONOMIC DESIRES 



17 



one of the subordinate motives, but generally it is done for the 
purpose of gaining a reward in the form of material goods. 

Desire for esteem. The desire for esteem or for the good 
opinion, the praise, and the admiration of others is as genuine 
a motive for action as either of the other kinds of desire. It is 
in some cases the sole motive for action; but it is generally 
found working in combination with one or both of the others. 
As stated above, it is sometimes one of the motives to play. 
Even what appears to be the desire for material wealth is fre- 
quently in part a desire to achieve social esteem by means of 
material possessions. A woman's desire for finery is not solely 
nor usually due to her appreciation of the things themselves. 
It is generally and mainly a desire to be thought well of. The 
same may be said of a man's desire for those strange things 
which he so solemnly wears on state occasions when he takes 
himself seriously. The desire to make an impression upon 
others enters into his appreciation of a great many things 
besides clothes. It is an element in his desire for fine houses, 
trains of servants, costly equipages, and many other expensive 
things which add very little to comfort or well-being. 

Desire for material goods. Even when the desire for esteem 
seems the chief desire there is usually found a mixture of the 
others. The politician's desire for popularity is not in every 
case free from the desire for the salaries and other emoluments 
of office. Nor is the actor's desire for applause always free from 
the subconscious feeling that popular esteem may be followed 
by an enlarged income. 

Importance of balanced desires. While it is possible to discuss 
these three kinds of desire separately, yet, as a matter of fact, 
they are likely to be mixed in varying proportions in every 
individual case. It is probably better economically that they 
should be thus mixed and that no one kind of desire should 
exclude or predominate over the others. When this happens 
we are likely to have an unbalanced individual, of very little 
use to himself or anybody else. The one who cares inordinately 
for action, with very little regard for social esteem or for the 



1 8 PRINCIPLES OF NATIONAL ECONOMY 

material rewards of productive labor, is likely to waste his life 
in strenuous adventure, even if he does not become a criminal. 
The individual who cares inordinately for the esteem or admi- 
ration of others, with very little desire for action or for the 
material rewards of productive effort, is likely to be vain, 
effeminate, and weak even if he does not become a poseur, who 
tries to attract attention to himself by striking strange atti- 
tudes, saying weird things, or espousing strange causes. The 
individual who cares inordinately for material goods, with no 
liking for action or for the good opinion of his fellows, is likely 
to become hard, grasping, and miserly. Which of these three 
unbalanced individuals is the most undesirable would be hard 
to decide. 

So far as the nature of a man's desires can make him useful 
economically it is probable that the most useful man is the 
one in whom all these three kinds of desire are strongest, pro- 
vided there be a proper balance among them. The man who 
loves action intensely, who at the same time desires intensely 
that his fellow men should think well of him, and who has also 
an intense desire for an abundance of goods for himself and for 
those for whom he cares, will certainly be an energetic, neigh- 
borly, and, so far as his physical and mental powers will enable 
him to be, a productive individual. 

Satiability of desire. When we come to consider desires sep- 
arately and to compare them one with another, we find that 
they have certain things in common which are of the utmost 
importance to the student of economics. To begin with, all 
desires are satiable. 

Desire in general may or may not be satiable — that is no 
concern of the economist ; but the specific desire for any specific 
thing may be completely satisfied or satiated if the thing desired 
can be had in sufficient abundance. Many desirable things are 
to be had in sufficient abundance. In the case of air, for ex- 
ample, though it is a vital necessity, yet there is so much of it, 
except in crowded, poorly ventilated rooms, that everyone can 
have all he can possibly use. Under such circumstances no one 



ECONOMIC DESIRES 



19 



has any desire for more nor any motive for action looking to an 
increase of the supply. In a crowded room, or anywhere else 
where there is not enough, someone who desires more will have 
a motive to action, even if the action consists in nothing more 
than opening a window. 

The desire for air, however, does not differ in this respect 
from the desire for anything else. When it is fully satisfied or 
satiated it ceases to be a motive for action. So long as it 
is unsatisfied it is a motive for action. In other words, if there 
is enough of the object desired to satisfy everybody, no one is 
likely to bestir himself to try to produce more, even if he knew 
how to do so. If there is not enough of anything there is 
a motive for action looking to an increase of production, and 
if production is possible an industry is likely to come into 
existence. 

Unsatisfied desires as spurs to action. Not only is every desire 
satiable, but we observe as a part of our own experience and 
our observation of others that the more nearly a desire comes to 
being satisfied the weaker it becomes and the weaker the motive 
to action. Conversely, the further it is from being satisfied the 
stronger it is and the more powerful the motive to action. This 
is a physiological fact, which if anyone cares to dispute it, he 
can test by experimenting on himself, or merely by thinking 
about his own everyday experiences as they come to him. The 
hungrier a boy is for apples, the more powerful the temptation 
to acquisitive action. In the process of consumption the first 
apple is likely to taste a little better than the second, the second 
than the third, and so on, until eventually, if the supply of 
apples holds out, he may reach a point where an additional 
apple will add nothing whatever to his comfort or pleasure. 
This is true of every desire in the whole range of human 
interests. 

Care must be taken, however, to avoid shifting the attention 
from one desire to another. The desire for wealth in general is 
sometimes said to be insatiable. Even if this were true, as it 
probably is not, it would not refute the proposition that any 



20 PRINCIPLES OF NATIONAL ECONOMY 

specific desire is satiable. Wealth is a collective name for a 
vast number of things. As soon as the desire for one thing is 
satisfied there is very likely to be something else which one 
would Hke to have, and so on almost indefinitely. In other 
words, the attention shifts from one thing to another. Never- 
theless, when the desire for one specific thing is satisfied that 
particular desire no longer furnishes a motive to action. The 
thing desired will then be held in low esteem, will have little 
value, and, if it sells at all, will sell at a low price. 

Anticipated future desires. We must be careful also not to 
confine our attention to the desire of the present instant. We 
are creatures endowed with a certain degree of foresight. 
Therefore, the temporary satiation of a desire is not to be con- 
sidered as its complete satiation. After a good meal we are 
doubtless temporarily satisfied with food ; but that does not 
mean that we have no motive for further effort to procure food. 
We foresee other mealtimes in the future and realize that unless 
we bestir ourselves now we may have to go hungry then. In this 
respect the desire for food does not differ from the desire for 
anything else. If we were to foresee a set of circumstances in 
which we should not have air enough, we should be very active 
in the present trying to avoid those circumstances or to safe- 
guard our future supply of air. In short, forethought enters 
into the question of satiation of desire in the case of all crea- 
tures who have the capacity for appreciating future as well as 
present needs. 

Desires are self-centered. Next to the satiability of desires 
their most important characteristic is that they are self- 
centered, though not necessarily selfish ; that is, we desire the 
good things of life for some people more than for other people. 
We usually include ourselves in the preferred list. The others 
whom we include in this list (that is, those for whom we have 
this preference) are in some way grouped around ourselves as 
centers of appreciation and interest. Even the humanitarian 
who professes to care for mankind above all nations seems 
still to prefer mankind to other species. There are people who 



ECONOMIC DESIRES 21 

have so deep an interest in animals as to be unwilling to sacrifice 
any animal for the benefit of mankind. They are slightly less 
self-centered than the humanitarians, but even they cannot take 
quite the same interest in the lower as in the higher animals. 
In short, no one can avoid being slightly self-centered — caring 
more for some animals than for others, for certain races or 
nationahties of men than for others, or even for certain persons 
than for others. Generally it will be found that those species, 
nationalities, or persons for whom we care most are in some 
sense nearer to ourselves than those for whom we care least. 

This fact of self-centered interest must be taken as one of the 
original, or primary, facts in our problem of nation building. 
It is, therefore, very important that we examine it and see 
exactly what it means. 

What is self-interest ? Our discussion will center naturally 
around two main questions : first. What does it mean to be self- 
interested? and, second, Is it a good or a bad thing for each 
individual to be self-interested or at least slightly self-centered, 
as we shall call it ? In discussing the first of these questions it 
is not necessary to go very far into that form of hair-splitting 
analysis which considers whether benevolence is not merely 
another form of sfelfishness.'^ It is sometimes argued by a cer- 
tain kind of sophist that the benevolent person is benevolent 
because he gets pleasure from being benevolent. Since it gives 
him pleasure, it is only a form of self-gratification ; and since 
it is only a form of self-gratification, it is only another form of 
selfishness. It may be true, from a certain point of view, that a 
man may get more pleasure from the taste of food upon the 
palates of his children than upon his own. A sophist might say 
that he was as truly selfish as a man who got no pleasure 
whatever from the taste of food upon any palate but his own. 
However, no sensible person would remain long' in doubt as to 
which would make the better father. There is no doubt that 
the man who takes some delight in the welfare of his neighbors 

iSee the author's "Essays in Social Justice," p. 60. Harvard University 
Press, 1915. 



22 PRINCIPLES OF NATIONAL ECONOMY 

and fellow citizens is a better neighbor and citizen than a man 
who takes no pleasure whatever in such things. 

In trying to understand what self-interest really is there are 
two extreme views to be avoided. One is that self-interest 
means such extreme selfishness as to show no regard whatever 
for the interests of others ; the other is that benevolence means 
a real preference for other people as compared with self. Now 
self-interest simply means some preference for self as compared 
with certain other people •; and benevolence, instead of meaning 
a preference for other people, is quite compatible with some 
degree of preference for self. "There is probably no human being 
who has not some interest in other people besides himself ; 
neither is there anyone who does not care more for himself 
than he does for other individuals outside a rather narrow 
family or neighborhood circle. 

The difference between a selfish and a benevolent person. 
As a matter of fact the difference between a selfish and a 
benevolent person is one of degree. An extremely selfish per- 
son is one who has an extreme preference for self as compared 
with others and whose interest in other people does not extend 
beyond a rather narrow circle of relatives, friends, and neigh- 
bors. An extremely benevolent person is one who has only a 
mild preference for self as compared with others, whose in- 
terest in others extends to a rather wide circle of relatives, 
friends, neighbors, fellow citizens, and many other human 
beings, and who even includes some of the kindly animals in 
the circle of his care and protection. To prefer the satisfac- 
tion which the expenditure of a dollar on charity gives me to 
the satisfaction which it would give me in the gratification 
of my own palate does not mean that I have a deeper interest 
in the receiver of my charity than I have in myself. If I spent 
the dollar upon myself it might supply only a trifling need or 
gratify a mere whim or caprice, because I have spent so many 
other dollars on myself as to have supplied all my principal 
needs. But when it is spent in charity it may supply a vital 
need of someone else. If I were in exactly as great need as he 



ECONOMIC DESIRES 



23 



of the objects which my last dollar would purchase, and I then 
gave him my dollar, that would show that I appreciated his 
interest as highly as my own or even more highly than my own. 
If there are a number of people in whom I am so deeply inter- 
ested as to be willing to sacrifice myself even to a slight extent, 
I should pass for a fairly generous man. But while I am writ- 
ing this I am fully conscious of the fact that there are people 
in various parts of the world who are suffering from hunger, 
cold, and sickness. Yet I sit comfortably in my room instead 
of going out to find them and share my last dollar with them. 
They are so far away in space, or they are so removed from my- 
self in race, language, religion, or color, that I cannot cudgel my- 
self into caring as much for their comfort as I do for my own. 
If they were near neighbors or near relatives I should take a 
deep interest in them. Will the reader ask himself if he is not in 
about the same condition ? The way in which I appreciate an 
income for myself more than I appreciate an income for some- 
one else may be illustrated by means of the diagrams below: 



o 



V. 



E M' E" 



O 




.D 



D' 



-X 



Diagram A 

A's appreciation of his 

own income 



E E' 
Diagram B 
A's appreciation of B's 



"^ E 

Diagram C 
A's appreciation of C's 



In Diagram A let us measure the income of a certain man, 
whom we shall call A, along the line OX, and his appreciation 
of, or interest in, each dollar of his income along the line OY. 
Thus, if his income is equal to the line OE, his interest in each 
dollar is measured, let us say, by the line DE. But as his 
income increases, each dollar becomes a matter of less conse- 
quence to him. He could spare it with less real sacrifice, be- 
cause, having so many other dollars, he can still supply himself 
with all the necessaries of Hfe and some unnecessary things 



24 PRINCIPLES OF NATIONAL ECONOMY 

besides. In other words, if we assume that his income increases 
from a quantity measured by the Hne OE to a quantity meas- 
ured by the line OE , then his interest in each dollar will de- 
cline from an intensity measured by the line DE to an intensity 
measured by D'E'. Another increase, say to the line OE" , 
would bring another fall in his appreciation, or interest, say 
to the line D"E". From these assumptions we may derive the 
curve YDD'D" to indicate his appreciation of, or interest in, 
each dollar of his income. 

Another way of stating the case is as follows: Assuming 
that his income is measured by the line OE", to give up one 
dollar of his income would cause him a sacrifice measured by 
the line D"E". He would merely have to give up some unim- 
portant luxury for which he does not care very much. If he 
were to keep on giving until there remained an amount meas- 
ured by the line OE', he would have deprived himself of more 
and more important things or of things for which he cared 
more and more. To give away still another dollar would cost 
him a sacrifice measured by the line D'E'. If now he keeps on 
giving until there is left only an amount equal to OE, he will 
be cutting so deeply into his own needs that each dollar given 
away would deprive him of something very important to his 
own well-being and would occasion him a sacrifice measured 
by the line DE. 

Interest in those near to self. But this man has an interest 
in someone else and is genuinely desirous of seeing that other 
person comfortable and happy. In case that other person is 
peculiarly dear to him, his appreciation of that person's income 
might be quite as high as his appreciation of his own. In that 
case the same curve, YDD'D" in Diagram A, would represent 
his appreciation of the other person's income. But he will not 
feel so deep an interest in very many people. After you get 
beyond the members of his immediate family and a few inti- 
mate friends, if he is a generous man, and even before that, 
if he is a selfish man, you will find people in whom he has no 



ECONOMIC DESIRES 



25 



such intense interest. In this case his appreciation of the im- 
portance of an income to that other person will be represented 
by Diagram B. 

In Diagram B we will measure the income of the other 
person, whom we shall call B, along the line OX, and A's ap- 
preciation of B's income along the line OY. If B's income is 
very small, measured, let us say, by the line OE, A will desire 
to see that income increased. The intensity of that desire of 
A is measured, let us say, by the line DE. If now A's income 
is measured in Diagram A by the line OE", he will be willing 
to give up a part of his own income in order to add to B's 
income. The line DE in Diagram B is longer than the line 
D"E" in Diagram A. 

This kind of giving is quite consistent with the fact that 
A cares a great deal more for himself than he does for B. The 
relative height of the two curves YDD'D" in Diagram A and 
YDD' in Diagram B indicates the degree of preference for him- 
self. Under the conditions represented in the two diagrams, 
A will by no means divide evenly with B. That is to say, he will 
not cut his own income down from an amount measured by OE" 
to an amount measured by OE' in Diagram A in order to in- 
crease B's income to an amount measured by OE' in Diagram B. 
That would give them equal incomes ; but A's enjoyment of 
the last dollar of B's enlarged income would be measured by 
the line D'E' in Diagram B, while if he had kept that dollar for 
himself, his enjoyment of it would have been measured by the 
line DE in Diagram A. 

Interest in others who are not so near to self. When it comes 
to some other person, whom we shall call C, who is so distantly 
removed from A in space or in kinship that A takes very little 
interest in him, we may find that A's interest is represented 
by the curve YD in Diagram C. Applying the same compari- 
sons between Diagrams A and C that were made between 
Diagrams A and B, we shall find that A might give up a dollar 
to keep C from starvation, if C's condition were presented to 



2 6 PRINCIPLES OF NATIONAL ECONOMY 

him pretty strongly, but that is about as far as A will go in 
relieving C's distress. 

Under the conditions that we have described, A would pass 
as a very benevolent man. If he were what is ordinarily re- 
garded as a selfish man, the curves YDD' in Diagram B and YD 
in Diagram C would merely be somewhat lower than we have 
drawn them, or the curve YDD'D" in Diagram A would be 
higher than we have drawn it. 

Nearness in kinship. Even though a generous man will care 
a great deal for the interests of a great many people, neverthe- 
less he is somewhat self-centered in his appreciation of or inter- 
est in others. He will care more for some people than for others, 
— more, for example, for his own wife and children than for 
other men's wives and children, more for his own relatives than 
for other people's relatives, more for his own neighbors than for 
other people's neighbors, more for his own fellow citizens than 
for the citizens of other countries. Those for whom he cares 
most, or whose interests he feels most keenly, are those who 
are in some way closely associated with himself. They are 
near to him, if we may be permitted to use the word ^' near " in 
several senses besides the geometrical or geographical sense. 
They may be near to him in point of kinship. Thus, other 
things equal, he will be more generous toward his near of kin 
than toward those who are distantly related to him, toward 
human beings than toward animals, and toward the higher 
than toward the lower animals. Again, mere geometrical near- 
ness counts as a factor. A man who is suffering at his door or 
in his immediate neighborhood will move him more than a man 
who is suffering equally but who is a long way off. This may 
sometimes be a stronger factor than nearness of kinship. That 
is, a near neighbor who needs help will appeal more powerfully 
to his sympathy than a near relative who lives a long way off. 
He may even do more for an animal with whom he is closely 
associated, such as a favorite horse, dog, or cat, than for some 
human being who is far away. Space is almost as important a 
factor as kinship in limiting his interests. 



ECONOMIC DESIRES 



27 



Nearness in time as well as in space. Time also is a factor. 
Our generous man is more interested in his immediate children 
than in his distant descendants, more in his contemporary fel- 
low citizens than in future generations. He is more interested 
even in his own present wants than in his future wants.^ 

There are other senses than space, kinship, and time in which 
the word "near" can be used. There are those who are near 
in the sense of like-mindedness. They who think and feel on 
most important questions as he thinks and feels may be said to 
be near him in a very 
important sense. He 
is pretty certain to 
care more for them, 
other things equal, 
than for those who 
think and feel differ- 
ently. This may some- 
times prove so strong 
a tie as to cause him 
to desert not only his neighbors and fellow citizens but even 
his family in order to take sides with those who think and feel 
as he does. 

In short, a man's interest in others is limited by the factor 
of distance in space, time, or kinship, and in unlikeness, either 
physical, moral, or mental. The greater the distance which 
separates them from him in any or all of these respects, the 
less his interest in them tends to become ; while the nearer they 
are to him in any or all of these respects, the more intense his 
interest in them tends to become. He is thus self-centered in 
his appreciation of the interest of others even when he is 
broadly generous. When he is narrowly selfish he is more 
narrowly self -centered. 

Self-centered appreciation. This principle of self-centered ap- 
preciation may be illustrated by the diagram above. Let us 

1 Cf . Chapter XXXVIII, on The Desirability of Capital and its Relation to 
Interest, 




28 PRINCIPLES OF NATIONAL ECONOMY 

assume that the individual's appreciation of the interest of 
various persons, including himself, is measured along the line 
OY. Then let us assume that he himself stands at the point O, 
while others are ranged along the line OX in the order of their 
nearness to himself in some of the senses in which we have used 
the word "nearness." Let us take kinship, for example. Those 
nearest of kin would stand on the line OX nearest the point O, 
and those most distantly related near the opposite end, or the 
point X. We will now let the curve SS' represent the selfish 
man's appreciation of the interests of various persons. The 
line OS measures his appreciation of his own interest, or his 
interest in himself. His appreciation of the interests of another 
person is measured by the perpendicular distance from the point 
on the line OX where that person stands to a point on the line 
SS'. Thus his appreciation of the interests of his immediate 
family may be almost as high as his appreciation of his own 
interest. But he cares so little for other people, and those for 
whom he cares even a little are so few in number, that the 
curve SS' falls very rapidly. Distant relatives who stand be- 
yond the point S' on the line OX do not concern him in the 
sHghtest degree. He has no appreciation at all of their interests. 

In the case of G, who is a generous man, the curve is differ- 
ent. It is represented by the curve GG'. Following the same 
explanation as was given of the curve SS', we find that the 
curve GG' represents him as caring a little more for a very few 
persons than for himself. Then his interest in others begins 
to decline the farther they are from himself, until, when we 
find some who are so far removed as to stand beyond the point 
G' on the line OX, his interest in them disappears altogether. 

It is human to show preferences. Any being who did not 
show such preferences as these would scarcely be human. He 
who would not sacrifice a trifle even to save the life of his 
nearest of kin or his nearest neighbor would not be a man but 
a devil. Again, he who would not show more interest in his 
near of kin than in his distant of kin, in his near neighbors 
than in his distant neighbors, in his fellow citizens than in the 



ECONOMIC DESIRES 29 

citizens of other countries, in kindly disposed men than in evil- 
minded men, in men than in animals, or in the higher than in 
the lower animals, would not be much better than a devil. If, 
in a struggle between a man and a tiger or a man and a disease 
germ, he did not show some disposition to favor the man, or if 
in the struggle between a good man and a criminal he did not 
show a preference for the good man, we should probably call 
him by some pretty hard names. Zeus alone among the gods 
has been represented to us as showing no preference for either 
the Greeks or the Trojans in their memorable struggle. All 
the lesser gods showed preferences and took sides, but he main- 
tained an attitude of supreme indifference to the petty quarrels 
of mortal men. If you will try to appraise his morals you may 
find some difficulty in deciding whether they were godlike or 
devilish. They certainly were not human. 

Does it work well to be self-centered ? We come now to the 
second of the questions stated earlier in this chapter. Does 
it work well or badly for the individual to show self-interest 
or to be self-centered in his appreciation of human interests? 
No one is likely to deny that he should show a preference 
for human beings as compared with other creatures. We hear 
a few vague suggestions now and then to the effect that each 
one should be a friend to man and that he should not show 
preference for special groups or classes of men. Aside from 
the vagueness of the idea of friendship to man there are one 
or two difficulties. Suppose you found a person who was not 
a friend but an enemy to man, should you befriend him or 
not ? If you befriend an enemy of man are you yourself a very 
good friend to man ? In order to befriend man must you not 
be an enemy to the enemies of man ? If so, you must dis- 
criminate and show a preference for the friends of man as 
against the enemies of man. In other words, you must divide 
men into at least two classes, namely, the friends and the 
enemies of man, and show more regard for and interest in one 
class than in the other. In the case of the average individual 
these classes resolve themselves into those whom he approves^ 



30 



PRINCIPLES OF NATIONAL ECONOMY 



on the one hand, and those whom he disapproves, on the other. 
If he is wise in his approvals and disapprovals this will prob- 
ably work well. He lends his encouragement and strength to 
those who pass it on, — who use the strength which they re- 
ceive from his friendship in doing good rather than evil. Thus 
the giver does more good than he would if he gave his en- 
couragement and strength to evil men and good men alike. He 
should show at least that degree of preference for some men as 
against others. 

Preferring some people to others. But granting that one may 
be justified in showing a preference for good as compared with 
bad men, is one justified in showing a preference either for 
himself or for those who are near to him in any of the senses 
which we have been discussing; that is, for his family or his 
neighbors as compared with others outside those circles ? There 
is something to be said in the affirmative, provided the prefer- 
ences are not too extreme. Volumes have been written on this 
and similar problems, and doubtless many more will be written. 
The affirmative argument may be stated briefly in the form of 
a series of propositions : 

1. Who ought to look after and safeguard each interest? 
Every interest ought to be safeguarded and provided for by the 
person who can do so most effectively. National or social wel- 
fare consists in the most complete satisfaction of all the inter- 
ests of all the people. The more fully and completely every 
interest is safeguarded and provided for, the greater the prosper- 
ity and welfare of the whole group. Therefore, when each and 
every interest is looked after by that particular person who 
can look after it most thoroughly and successfully, the social 
welfare will be greater than it would be if some interests were 
looked after by persons who were not best fitted to do so. 

2. Generally speaking, but with a few exceptions, each and 
every interest can best be safeguarded and looked after by that 
person who knows and understands it most intimately. Jones 
probably knows his own interests better than he knows those 
of Smith. If so, he can usually look after his own interests 



ECONOMIC DESIRES 



31 



more effectively than he can attend to those of Smith. Like- 
wise, and for the same reasons, Smith can look after his own 
interests better than he can those of Jones. Under these cir- 
cumstances the interests of both Jones and Smith will be looked 
after better if each looks after his own than if each looked after 
the other's. However, there may be exceptions to this rule. 
Jones may know his own interests better than Smith, but may 
be in some unfortunate condition which renders him unable to 
look after them. In such a case, even though Jones does know 
his own interests better than Smith, Smith may nevertheless be 
able to look after them better than Jones can. In such a case it 
would promote the prosperity of that community of two if 
Smith would spend a part of his time looking after Jones's 
interests. However, as soon as Jones recovers from his in- 
capacity it will be better for both if they return to their normal 
habits and each looks after his own interests. 

3. Who knows each interest most completely? Generally 
speaking, but with a few exceptions, the individual of mature 
years and sound mind knows his own interests more intimately 
than other people know them and also more intimately than he 
knows the interests of other people. Young children, of course, 
do not know their 'interests as well as these are known by their 
elders, nor do persons of unsound mind know their interests as 
well as these are known by individuals of sound mind. Oc- 
casionally a mature person of sound mind may be mistaken in 
his judgment as to his own interests, and some exceptionally 
wise friends may know them better than the person himself 
does. In all these cases there are excellent reasons why wiser 
persons should take a great deal of interest in the affairs of 
those less wise than they, but it is well not to be too hasty in 
assuming that you are wise enough to look after the interests 
of a mature person of sound mind better than he can do it 
himself. 

4. Generally speaking, but with a few exceptions, the individ- 
ual knows the interests of his near of kin better than he knows 
those of his distant of kin, of his fellow citizens better than 



32 PRINCIPLES OF NATIONAL ECONOMY 

those of citizens of other countries, of members of his own 
race better than of members of other races. He is in much 
more intimate contact with the members of his immediate 
family than with others, and, even aside from all questions of 
affection, he can gauge their desires and understand their needs 
better than he can the desires and needs of those with whom he 
is not so intimately associated. That is a sufficient reason why, 
in the economy of nature, he should care more for them than 
for others. If he were driven by his affections to try to care 
for those whom he did not understand, while neglecting those 
whom he did understand, he would bungle much more than he 
does. Therefore nature is wise in so ordering things that 
affection and understanding normally go together. 

5. Generally speaking, but with a few exceptions, the individ- 
ual knows the interests of his near neighbors more intimately 
than he knows those of his distant neighbors. Here again it is 
a wise provision that friendship and understanding go together. 

6. Whom can we reach with the least waste of energy ? Gen- 
erally speaking, but with a few exceptions, the individual can 
reach his near neighbors with less effort and waste of energy 
than he can reach his distant neighbors. It is wise, again, that 
neighborly feeling develops where there is the most power to 
help. If each man neglected his near neighbors and attempted 
to look after his distant neighbors, while their near neighbors 
in turn neglected them and tried to look after their distant 
neighbors, there would be much working at cross purposes, and 
much energy would be wasted because each tried to do that 
which he was not well situated for doing, while neglecting the 
work which he was well situated for doing. 

In conclusion, it is pretty clear that, as a general rule, a 
community in which each individual works effectively, looking 
after those interests which he can look after most successfully 
and with least waste of effort, is better than one in which each 
individual works ineffectively, trying to look after interests 
which he can look after less successfully and with greater waste 
of effort. Since each individual knows his own interests and 



ECONOMIC DESIRES 33 

the interests of those nearest him better than he knows the 
interests of those farther away, we must justify at least a 
moderate amount of self-preference, or self-centered apprecia- 
tion of the interests of others. But it is difficult to tell just 
how far this rule should be carried. When communication and 
transportation were very difficult, the obstacles in the way of 
helping people who were a long way off would have made it 
very wasteful to try to do very much for them. Only one's 
near neighbors could be helped effectively, and other people 
outside that circle had to be left to their near neighbors, if they 
could not look after themselves. Now that the obstacle of dis- 
tance is not so great it would seem to be economical to widen 
one's geographical neighborhood somewhat. 

Harnessing self-interest to public uses. Law and government 
can do little or nothing toward eliminating self-interest, even if 
it were desirable to do so, which it is not ; but it is possible to 
harness it to the good of the nation. Assuming that a man will 
try hard to promote his own interests and the interests of those 
nearest to him, it is only necessary to confine his efforts to the 
field of usefulness or productivity. If he is never allowed to 
rob, steal, or do any injurious act in trying to promote his own 
interest, but is told that he will be permitted to do anything 
useful and receive pay for it or to produce some desirable prod- 
uct and sell it, he will then have a very strong reason for doing 
useful things or producing desirable objects. If a desirable ob- 
ject is produced, not because the producer has a benevolent 
interest in the consumer but because he has a selfish interest in 
the price which he can get for it, it will do the consumer just as 
much good as though it were produced for benevolent reasons. 
When everyone is driven by self-interest to produce as much 
as he can or to render as good service as he can, there will be a 
great deal produced and much good service rendered. There- 
fore, even if one did not approve of any degree of self-interest 
whatever, one might consistently admit that the law was mak- 
ing the very best of a bad situation by thus harnessing that 
powerful motive to useful service and productive work. Seeing 



34 



PRINCIPLES OF NATIONAL ECONOMY 



that the law could not possibly transform self-interested per- 
sons into benevolent persons, the next best thing would cer- 
tainly be to hedge them about so as to make it impossible for 
them to pursue their own self-interest in any except useful and 
productive lines. 

No visible harmony of human interests. This does not as- 
sume that there is any such thing as a natural harmony of 
human interests. If anything is clear it is that human interests 
are frequently in conflict. Unless there is an umpire or a 
tribunal to decide these questions of conflict, an overdeveloped 
self-interest will frequently drive men into actual conflict or 
lead one to do something in his own interest which would be 
injurious to others. It is one of the functions of law and gov- 
ernment to adjudicate these conflicts and also to forbid, with 
suitable penalties, any injurious act. When the laws are in- 
telligently framed and rigidly executed this leaves the individual 
no choice. However self-interested he may be, and however 
indifferent he may be to the interests of others, he must seek 
his self-interest by useful rather than by injurious acts. When 
he is thus efficiently controlled the more intense his self-interest 
becomes, and the more intense his interest in his family or near 
friends, the more intensely he will strive to do useful things, not 
because he wants to be useful but because he wants the reward 
of usefulness. To harness this powerful motive of self-interest 
to the kinds of work which benefit the nation — which increase 
wealth and prosperity — is like harnessing a great natural force 
like steam or electricity' In the one case the harness consists 
of laws and regulations ; in the other it consists of mechanical 
devices. 

It has been shown above that all desires are satiable and that 
they are self-centered. It is necessary to understand both these 
facts before we can go very far in our study of economics.. 
But what of desire itself ? What does it mean to the economist 
and what is its economic function ? 

Desire a symptom of dependence. A desire for a physical 
object is a symptom of the dependence of the organism upon 



ECONOMIC DESIRES 



35 



something outside itself. This dependence may be of various 
kinds and degrees. The organism may depend upon something 
outside itself for its life, well-being, or comfort, or merely for 
its pleasure, convenience, or amusement. An unsatisfied desire 
is a symptom of a lack, in the time and place where the desire 
is felt, of something upon which the organism depends. The 
complete satisfaction or satiation of a desire is a symptom of 
the sufficient abundance, but not superabundance, of the ob- 
ject of the desire. When the object is too abundant it may 
become an object not of desire but of repugnance, even though 
in smaller quantities the same thing would be an object of 
strong desire. The timber which once stood on the farmer's 
land and had to be cleared away before he could grow crops 
will serve as an example of superabundance. Timber in almost 
any modern community, where it is needed for fuel and for 
building purposes, will serve as an example of scarcity. 

The complete satisfaction of all desires whatsoever, if such 
a condition can be imagined, would be a symptom of the suffi- 
cient abundance of everything upon which the organism de- 
pended in any way or in any degree. Such a condition would 
be one of complete adaptation, a complete harmony between the 
organism and its material environment. 

The two roads to harmony. In the direction of that state of 
harmony two roads lie open — for a little way at least. No one 
knows how far they lead. One road is known in the Orient as 
the Way of Nirvana, or emancipation from craving. By the 
eradication of all craving from our minds, if that could be ac- 
complished, we should certainly reach a state wherein there 
would be no dependence upon, or scarcity of, things outside 
ourselves. We know that we can travel this road for a little 
way ; that is, we can discipline ourselves in the virtues of the 
simple life, and we can learn to like certain things whereof 
nature is bounteous, such as air, sunlight, and the clouds, the 
green of the fields and the blue of the sky, and we can learn 
to think less of those things whereof nature is niggardly in her 
supply, such as objects of ostentatious display, luxury, and 



36 PRINCIPLES OF NATIONAL ECONOMY 

pride. This would reduce somewhat our feeling of dependence 
upon objects outside ourselves, or at least it would reduce our 
sense of irritation at the everlasting scarcity of the things upon 
which our happiness seems now to depend. But that we can 
eradicate all desire scarcely seems possible. 

The way of labor. The other road is the way of labor. They 
who follow this road, instead of eradicating or repressing their 
desires, labor to increase the abundance of whatever objects 
they happen, for any reason, to desire, provided, of course, 
nature has not already supplied them in sufficient abundance 
when and where they are desired. They also labor to decrease 
the supply of whatever objects happen, for any reason, to 
arouse their repugnance. We occidentals generally prefer the 
way of labor, and we are very certain that we can travel it for 
a little way. Perhaps the oriental mind, wearying of the ever- 
lasting struggle of population against scarcity and not being 
gifted with our mechanical ingenuity, despaired of making 
much progress in this direction and turned to Nirvana as the 
more hopeful alternative. We occidentals have not yet begun 
to suspect that there is any limit to our possible progress in 
production, therefore we are not yet ready to forsake it for the 
road to Nirvana. The Occident, with its mechanical ingenuity 
and its love of strenuous action, finds it easier to increase its 
production than to control its desires or to emancipate itself 
from craving. 

The restless effort of body and mind to produce everything 
we desire is the dominant fact in the economic life of Western 
nations. It also dominates, though in less degree, the economic 
life of the Eastern world. The philosophic doctrine of Nirvana 
is little more than a protest against it. The pursuit of the means 
of satisfying desire is the all but universal occupation. The 
great mass of people everywhere are driven by their unsatisfied 
desires. These are the great motive forces in all human activity. 
A completely satisfied or satiated desire ceases to be a motive 
force, ceases to cause men to act. A state of universal and com- 
plete satisfaction might be a blissful state, but it would not be 



ECONOMIC DESIRES 



37 



an active state unless, indeed, the chief desire were for action 
itself. Unless that were the chief desire there would not be 
much going on. 

Human activity determined by desire. Not only must we look 
for the springs of human action in the unsatisfied desires of 
men, but we must also expect to find that the direction of men's 
activities is determined by the character of their desires and 
that the intensity of their action is determined by the degree of 
unsatisfaction in which the desires are found. The expression 
"degree of unsatisfaction" is a more accurate way of saying 
what is sometimes meant by the "intensity of desire." When a 
desire is completely satisfied it has no intensity ; it ceases to 
exist as a motive force. When it falls short of complete satis- 
faction it has some degree of intensity, and the further it falls 
short the more intense it becomes. Therefore it is important 
that we understand the nature of our desires, especially those 
which are normally unsatisfied. Before we can get very far in 
the study of economic activities we must understand what it is 
all about. It is concerned with the satisfaction of those desires 
which are normally unsatisfied, which can be satisfied only 
through some conscious effort. Literally, that is what it is all 
about. 

To sum up, we find that desire (that is, unsatisfied desire) 
is, first, a symptom of the fact that something is lacking in 
the adjustment of man to nature, or that something needs im- 
proving in the relation of man to his surroundings ; second, it 
furnishes a motive for action in overcoming the lack or effect- 
ing the improvement. The fact that desires are satiable indi- 
cates that the imperfect adjustment of man to nature may be 
improved and perfected by increasing the supply of the thing 
desired. The fact that desires are self-centered makes it pretty 
certain that our activities will be a little more strenuous in the 
satisfaction of our own desires and the desires of those who are, 
in some sense, "near" to us, than in the satisfaction of the de- 
sires of other beings. These facts give direction and character 
to most of our economic activities. 



Material 
Objects 



CHAPTER III 
ECONOMIC GOODS 

' Objects of repugnance (Nuisances or f Harmful to man 

" Illth ") \ Useful but superabundant 

^, . . . ,.rr rUseless but not harmful 

Objects of mdifterence -! ^rriu. az ■ . ,j: j, 

l^ Useful but sufficient (free goods) 

_ Objects of desire (Economic Goods, or Wealth) : Useful and scarce 



The physical objects with which we are surrounded may be 
grouped under three classes according as our attitude toward 
them is one of repugnance, indifference, or desire. In other 
words, they are either objects of repugnance, objects of in- 
difference, or objects of desire. 

Objects of repugnance. Objects of repugnance include not 
only those few things which are always and everywhere thought 
to be harmful but also a much larger number of things which 
are, under certain circumstances, useful but, under other cir- 
cumstances, become harmful because of their superabundance. 
Nothing, for example, could be more useful than water, but too 
much water, especially in our cellars or in swampy land, be- 
comes an object of active repugnance. We work as hard to get 
rid of the surplus when there is too much as we do to get a 
larger supply when there is not enough. Many of the weeds 
in the farmer's fields have some uses, but they are so abun- 
dant as to interfere with the farmer's crops and are therefore 
nuisances. 

Free goods. There are not many things that are always and 
everywhere objects of indifference or that are never either use- 
ful or harmful. There are a good many things that are objects 
of indifference merely because they are, in the circumstances of 
time and place, amply sufficient for all our needs, but not so 

38 



ECONOMIC GOODS 



39 



abundant as to do us any harm. Air is the most familiar ex- 
ample of this kind of sufficiency. In many places there is 
enough water, but not so much as to cause us any annoyance. 
Wherever this kind of sufficiency is found we are found to be 
indifferent toward the sufficient object. There is no good rea- 
son why we should pay much attention to things of this class. 
We are interested in improving our condition. If a given thing 
is sufficient for all our needs and not so abundant as to bother 
us in any way, our condition with respect to that thing cannot 
be improved. It would be economical of our time and strength 
to reserve them for improving conditions that need improving. 
Our indifference toward things that need no improving is, there- 
fore, a means of economizing our time and strength and enables 
us to apply ourselves to those things that are either too abun- 
dant or not abundant enough for our highest well-being. 

Economic goods. While we must obviously give a good deal 
of attention to objects of repugnance and try to thin them out, 
or reduce their supply, our chief concern nowadays is with 
objects of desire, or objects of which we desire more than we 
have. Those peoples who have gained very little control over 
nature and who are therefore living under savage surroundings 
were much more concerned with objects of repugnance than 
we are. We are still, however, actively combating weeds, para- 
sites, disease germs, etc., in spite of the fact that our chief ac- 
tivity is the pursuit of objects of desire rather than fighting 
objects of repugnance. The problem of getting more than wc 
have of certain scarce things is the problem of income, of pro- 
duction, and, in a very large sense, of human adaptation. 

What are economic goods ? Before we can go very far in 
our study of income and expenditure, or of production and con- 
sumption, we must get a fairly clear idea as to the sort of things 
that make up income, or the sort of things that men try to 
produce. When it was stated in the first chapter that the 
necessity for economy arose out of the fact of scarcity, it might 
have been guessed at once that scarcity has a great deal to do 
with our concept of wealth and with our efforts to produce it. 



40 



PRINCIPLES OF NATIONAL ECONOMY 



More accurately, perhaps, we should say that the only things 
we try to produce are the things of which we do not have 
enough. It may sound a little queer at first for one to say that 
his income consists of things that are scarce, or things of which 
he does not have enough. It will, therefore, be necessary to 
spend some time in making this point absolutely clear, other- 
wise we shall never be free from error and confusion. As a 
matter of fact, the very first step toward a true understanding 
of the nature of wealth is a clear perception that wealth in the 
economic sense consists of things that are scarce and for that 
reason need to be economized. When it is said that the 
necessity for economy grows out of scarcity and that we try 
to produce only the things that are scarce, we do not imply 
that everything is scarce. Some very useful things are very 
abundant — so abundant that everyone can have all he wants ; 
and when he gets all he wants no one else is deprived of any- 
thing that he wants. Such things do not have to be economized, 
hence they are not economic goods.- In fact, so long as they are 
sufficiently abundant they give us no concern, but when they 
become scarce we spend our time in trying to get, more. Only 
those things are economic goods which have to be economized ; 
that is, which are scarce, or of which we do not have as much 
as we should like. 

Two meanings of "wealth." Now the word "wealth" has two 
meanings. In the first place, it is the collective name for all 
economic goods, or for all goods that have to be economized ; 
that is, for goods that are scarce. In the second place, it is the 
name of a condition or state of being. It comes from the older 
word "weal," which means very much the same as "well-being." 
These two meanings, while apparently different, are yet very 
closely related. The condition of well-being which we call 
wealth depends upon the possession of an adequate supply of 
those things which we call wealth ; that is, the things which are 
ordinarily scarce and which have to be economized. He who 
lacks an adequate supply is poor ; he who possesses an adequate 



ECONOMIC GOODS 41 

supply is rich or in a state of wealth. In short, those economic 
goods called wealth are the goods upon which weal, or well- 
being, depends. Well-being is increased when these goods are 
increased or economized ; well-being is decreased when these 
goods are decreased or wasted. 

How well-being depends upon wealth. It could not be said 
of anything which is not scarce that our well-being increases 
when we have more of it and decreases when we have less of it. 
There is such an abundance of air, for example, under ordinary 
circumstances, that no one would be any better off than he is 
now if the supply of air could be increased, nor would anyone 
be any worse off if the supply of air were slightly decreased. 
In other words, no one's well-being depends upon more air, 
even if it could be produced. If, however, air were so scarce 
that there was not enough to go around, then not only would 
it need to be economized very carefully but there would be some 
advantage in producing more of it. The weal, or well-being, 
of mankind would be improved in proportion as more air could 
be produced ; mankind would be injured in proportion as air 
was wasted or destroyed. While, therefore, we can say that air 
is a necessity in a certain absolute sense, yet in a practical eco- 
nomic sense we cannot say that anyone would be better off if 
more air were produced or if it were even wisely economized ; 
nor can we say that anyone would be worse off if a little air 
were destroyed or wasted. There would still be enough to 
satisfy everybody. That is why air, though an absolute neces- 
sity, is not an economic good. We should gain nothing by try- 
ing to increase the supply or to economize in the use of the 
existing supply. Since we do not gain anything by economizing 
it, it is not an economic good. Where abnormal circumstances 
arise, in which there is not enough air, then it has to be econ- 
omized and becomes at that particular time and place an 
economic good. If such circumstances could last, air would 
become wealth in the same sense that food, clothing, fuel, and 
certain other things are now wealth. It would then be true of 



42 PRINCIPLES OF NATIONAL ECONOMY 

air, as of these other things, that well-being could be increased 
by producing or economizing air and decreased by destroying it, 
wasting it, or otherwise making it scarcer. 

The question of having more or having less. Water is another 
illustration; perhaps a better one, because there are many 
places where water is so abundant that it does not have to be 
economized at all, while there are other places where it is so 
scarce that it has to be economized very carefully indeed. In 
the former places water is not wealth; in the latter it is. In 
the former no one labors to secure any more ; in the latter they 
do. In the former no one would be better off if there were 
more water; in the latter some people would be better off. 
In the former well-being does not depend upon a little more or 
a little less water; in the latter it does. In the former there 
is no occasion for economizing water ; in the latter it is very 
important that it be economized and made to go as far as pos- 
sible. In the former the formula ^"^more water, greater well- 
being; less water, less well-being" is not true; in the latter 
it is true. This is the test in every time and place as to whether 
water is wealth or not. All that has been said of water may be 
said of anything else. The same test must be applied to deter- 
mine whether it is wealth or not. As a matter of fact, water, 
like a great many other things, is sometimes too abundant, — 
so abundant that men find it to their advantage to go to con- 
siderable pains in order to get rid of some of it or to lessen the 
supply. In such cases it may be called tilth. 

Relation of value to economic goods. We have gone to con- 
siderable pains to point out that one characteristic of economic 
goods is that they are always scarce. It is this which gives them 
the power to induce men to work and to economize. Another 
characteristic is that they all have value or power in exchange. 
The power to command other desirable things in peaceful and 
voluntary exchange — that is, value — is very much the same as 
the power to induce men to work. That is to say, the thing 
which possesses one kind of power will always possess the other, 
if indeed it be not incorrect to speak of them as different kinds 



ECONOMIC GOODS 43 

of power. The object which possesses this power to appeal 
to human motives in such a way as to induce men either to 
give up some desirable object in exchange for it or to labor 
in order to produce it is always said to be valuable. This power 
depends in all cases upon the scarcity or insufficiency of the 
existing supply of the object in question. This simply amounts 
to the truism that a thing would not possess this power unless 
someone could be found who wanted more of it than he had. 
If a person or a considerable number of persons can be found 
who want more than they have, there will be someone who will 
give up something in order to get more or who will work in 
order to produce more. These things, again, are economic 
goods, or wealth. Since, as we have just shown, they all possess 
value, it amounts to the same thing to say that wealth consists 
of things that have value. In short, such words as ^'wealth," 
^ Value," ^'economic goods," and ^^ economy" all center around 
the one great fact of scarcity ; that is, the insufficiency of cer- 
tain things at certain times and places to satisfy desires. Out 
of this great fact grow also such ideas as property, industry, and 
foresight. No one wants to secure property rights, for example, 
in anything of which everybody has enough. But when any- 
one fears that there may not be enough of a certain thing to go 
around, and that he may, therefore, be left out, he naturally 
wants to guard against that calamity by getting possession of 
a supply. He will try to get possession of a supply either by 
producing it himself or by buying it of someone else, and he 
will try to guard his treasure carefully. When the state steps 
in and undertakes to protect him in his possession, he has then 
secured a property right in the thing in question. Again, pro- 
ductive industry, as already shown, is directed toward alleviat- 
ing scarcity or increasing the supply of something of which the 
supply would otherwise be insufficient. Frugality and foresight 
are exercised to provide against scarcity. 

Meaning of scarcity. Now scarcity means nothing except 
insufficiency in a given time and place to satisfy the desires 
which exist in that time and place. It does not mean rarity, 



44 PRINCIPLES OF NATIONAL ECONOMY 

because, no matter how rare a thing may be, if there is as much 
as is wanted it is not scarce ; and no matter how great the total 
quantity, if there is less than is wanted it is insufficient, or 
scarce. And it is always well to bear in mind that a thing is 
scarce, if at all, because the available quantity in a given time 
and place is insufficient. No matter how much water there may 
be in the Mississippi River, it does not alter the fact that water 
is scarce a few hundred miles to the westward ; no matter how 
much copper there may be in the bowels of the earth, it does 
not alter the fact that there is less copper in available form 
than is needed on the surface. It is this fact which induces 
men to labor to move things from one place to another. 

Mistaken valuations. Before proceeding farther it is nec- 
essary to make one important qualification — men do not always 
know upon what their weal, or well-being, depends. If they are 
mistaken on any phase of this question, they will be placing a 
high value upon some things that are not good for them and a 
low value or no value at all upon some things that are good for 
them. They are poor economizers who do this, but there are 
many poor economizers in the world. This is the same as say- 
ing that they will sometimes desire more of a thing than they 
have when they really have too much already, or less than they 
have when they really have too little already. With this qual- 
ification in view, all we can say is that men will regard as wealth 
everything upon which they think their well-being depends in 
the practical economic sense described above. That is, if they 
think they need more than they have, they will strive to get 
more, either by offering something for it, thus giving it a market 
value, or by trying to produce it, thus creating an industry. 
This explains why it is that the student of economics is some- 
times compelled to include among economic goods, or wealth, 
articles which he himself would not use or which he regards as 
deleterious, such as opium, alcoholic drinks, or tobacco. 

Importance of desiring the right things. Teaching or per- 
suading people to want the right things has commonly been 
regarded as the work of the educator and the preacher rather 



ECONOMIC GOODS 45 

than the economist. The latter has not generally undertaken 
to pass judgment on the wants of the people. He has assumed, 
rather, that his work was done when he had shown how such 
wants as the people happen to have are satisfied and may be 
satisfied more and more fully. But no one who really has at 
heart the welfare of the people can be indifferent to the quality 
of their wants or desires. What men want most they will try 
hardest to get ; the character of their wants or desires, rather 
than their real needs, will therefore determine the character of 
their industries and their government. But, more important than 
that, if their desires are opposed to their needs (that is, if they 
desire things that are harmful to them, then the more efficient 
their system of production becomes the more harm they will do 
themselves. In that case an efficient industrial system promotes 
national deterioration rather than national well-being. If one 
were to make a study of the wreckage of nations, one would 
probably find that more had gone to pieces because their wants 
were wrong than because they were not able to supply their 
wants. That is one reason why, as stated earlier in this chapter, 
the subject of consumption is of such tremendous importance. 
Necessity of economizing means of production. Thus far in 
discussing the necessity for economy we have been considering 
the means of satisfying our wants directly. But we must con- 
sider also the necessity of economizing the indirect means of 
satisfying wants. In the effort to overcome scarcity (that is, in 
the production of goods) it is necessary to make use of various 
factors of production, such as labor, tools, raw materials, etc. 
These also are scarce and have to be economized. To be sure, 
many things that are essential to production are not scarce. 
These are not considered as factors of production ; that is, they 
are not economic factors of production at all. Carbon dioxide 
is just as essential to the growing of plants as nitrogen, phos- 
phorus, or potash, but there is plenty of carbon dioxide in the 
air, whereas in most soils nitrogen, phosphorus, and potash are 
scarce or tending to become scarce. Therefore these three sub- 
stances are considered as factors (that is, economic factors) in 



46 PRINCIPLES OF NATIONAL ECONOMY 

plant growth. Applying the same formula here as we did to 
other things earlier in this discussion, the average farmer can 
say, and say truly, ^^More nitrogen, more plant growth; less 
nitrogen, less plant growth." Therefore agricultural produc- 
tion is increased by increasing the nitrogen in the soil. The 
same may be said of phosphorus and potash, but the formula 
does not apply to carbon dioxide. This is a principle of the 
very greatest importance, as will be seen later. Some of the 
greatest problems in economics and social justice depend upon 
this formula and are incapable of solution without it. 

Why a thing has value. The fact that desirability and scar- 
city, and these alone, give value to a thing is perhaps clearly 
enough established by this time. Few will care to question the 
statement that not only must men desire a thing, but they must 
desire more than they have before they will strive to get more 
either by purchasing it or by producing it. Moreover, this is as 
true of a factor used in production, such as tools, as of an article 
of direct consumption, such as bread. It may not be quite so 
obvious, but it is none the less true, that this is also one of the 
great sources of that conflict of human interests which gives 
rise to most of our problems of justice and equity. This will 
be discussed in the next chapter. 

TEN CHARACTERISTICS OF ECONOMIC GOODS, OR WEALTH 

1. They are scarce; that is, there is less of them than is wanted. 

2. They have to be economized. 

3. Well-being is thought to increase as they increase and to 
decrease as they decrease. 

4. Men labor to produce them ; that is, to make them less scarce. 

5. Men try to secure them by purchase. 

6. They have value, or power in exchange. 

7. They become the subject of property rights. 

8. Wise men exercise frugality and foresight with respect to them. 

9. There is a conflict of interests among men with regard to 
them, because there is not enough of them to go around and satisfy 
everybody. 

10. They give rise to questions of justice and equity. 



CHAPTER IV 

ECONOMIC ACTIVITIES 

The purpose of our economic activities is to satisfy our eco- 
nomic desires. In Chapter II the chief of these were classified 
as (i) desire for action, (2) desire for esteem, and (3) desire 
for material goods. Our economic activities may be classified 
correspondingly as (i) pleasurable activities, (2) activities de- 
signed to win the esteem of other beings, and (3) acquisitive 
activities. 

Play. Pleasurable activities might be said to include the 
whole field of play, sport, and recreation, but we should be care- 
ful to exclude those forms of amusement or entertainment in 
which most of us remain as idle spectators while others are paid 
to amuse or entertain us. We should then include only those 
activities which the participants themselves enjoy so much as 
to require no other reward or incentive than the pleasure of 
participation. 

Activities designed to win the esteem of other beings include 
a great deal of our polite social intercourse and some of our 
religious ceremonialism. Acquisitive activities, however, in- 
clude most of our industrial and business life. There is usually, 
however, a mixture of motives, as indicated in our discussion of 
economic desires in Chapter II. 

Pleasurable activities play a large part in the economic life 
of most nations, especially of those which are distinguished for 
their energy and strenuosity. Hunting and fishing for sport, 
gardening, poultry-raising for pleasure, much literary and ar- 
tistic work, and a number of other avocations are carried on by 
persons whose chief or sole motive is in the pleasure of action. 
Besides, larger numbers of people spend considerable time in 
games and sports which have no productive end beyond the 

47 



48 PRINCIPLES OF NATIONAL ECONOMY 

pleasure of action. They derive a considerable part of the joy 
of living from these exercises rather than from the consumption 
of material goods. As material wealth increases, through im- 
proved and easier methods of production, more and more time 
is spent in pleasurable activities and less in activities that are 
purely acquisitive. 

If we could all make a living by playing ! If we could 
imagine a condition under which all that heart could desire in 
the way of material goods was freely provided, men would not 
have to do anything except what they liked to do. There would 
doubtless be much strenuous action, but it would take the form 
of play. However, so long as any class or classes of material 
goods are scarce, it will be necessary that work be done the 
chief motive of which is the desire for material goods rather 
than the pleasure of action. This contrast between doing what 
we enjoy and doing what is necessary to provide the material 
necessaries of life is well brought out in the old fable of the 
grasshopper and the ant. The grasshopper, it will be remem- 
bered, had spent the summer in pleasurable, the ant in acquisi- 
tive, activity. When winter came the grasshopper learned that 
these acquisitive activities had their compensations even though 
they may not be so very pleasant. 

Acquisitive activities. Though acquisitive activities all have 
the common motive of the desire for material wealth, they 
are, nevertheless, of many kinds, some being predatory, some 
merely acquisitive, and some productive or useful. It is obvi- 
ous that it makes a great deal of difference to the prosperity of 
the nation how its citizens generally acquire their wealth. The 
following outline attempts to classify the acquisitive activities 
of individuals according as they subtract from or add to the 
national prosperity. 

Ways of acquiring wealth. In the diagram on the following 
page the ways of acquiring wealth are divided into two main 
classes, — the uneconomical and the economical. From the 
social or national point of view it is uneconomical to have men 
acquiring wealth by methods which do not add to the total 



ECONOMIC ACTIVITIES 



49 



' Harmful < 



' Unecoriomical 



Acquisitive 
Activities 



. Neutral 



Econom- 
ical 



Primary in- 
dustries 



Secondary industries 



rWar 
Piracy 
Plundering 
Robbing 
Swindling 
Counterfeiting 
Adulterating goods 
. Monopolizing 
' Marrying wealth 
Inheriting wealth 

Benefiting through a rise in land 
values 

' Hunting 
Fishing 
Extractive -| Grazing 

Lumbering 
Mining 

r Tillage 

{Agriculture -j Plant breeding 
Forestry [Animal breeding 
Fish culture 
r Manufacturing 
Transporting 
Storing 
Merchandising 

' Healing 



Personal and professional services 



Teaching 
Inspiring 
Governing 
Amusins: etc. 



wealth or well-being of the society or the nation. When one 
man gains something by plundering, swindling, counterfeiting, 
or monopolizing, someone else loses a like amount and nothing 
is added to the total. In fact, if these harmful methods become 
general they are likely to discourage honest industry and ac- 
tually to diminish the total production of wealth. Even the 
neutral methods may become harmful if they result in wasted 
lives ; that is, if they enable men and women who would other- 
wise be productive and useful to live in idleness and luxury. 
The smaller the proportion of the people who live by means of 



50 PRINCIPLES OF NATIONAL ECONOMY 

the uneconomical methods the more prosperous the nation is 
Hkely to become. 

Economical ways of getting a living. By the economical ways 
of acquiring wealth are meant all those ways by which an in- 
dividual contributes to the wealth of the whole community as 
much as he gets. He may make his contribution by laboring 
either to produce commodities or to render direct service to 
some of his fellow men. In either case, where he gives honest 
service for honest pay he is enriching someone else in propor- 
tion as he is himself enriched. A nation in which this rule 
prevails universally, where everyone is contributing to the 
well-being of someone else in exact proportion as he himself 
prospers, has at least one of the conditions of general prosperity. 
If each one is capable and well trained, so that he can give 
efficient service (that is, if he contributes largely to the prosper- 
ity and well-being of someone else), then everyone is prosper- 
ous, which is the same as saying that the nation as a whole is 
prosperous. 

Primary industries. The economical ways of getting a living 
are subdivided into three classes : first, the primary indus- 
tries ; second, the secondary industries ; and, third, professional 
and personal service. The primary industries are those which 
produce commodities directly from their original and natural 
source, — which take material as nature provides it and appro- 
priate it to some human use or change it from a form which is 
nonusable to a form which is either usable or one stage nearer 
to usableness. For example, the elements which produce plant 
growth are not, in their natural state, available for human use. 
The farming industry converts these elements into something 
which is either usable, as in the case of fruits and vegetables, 
or at least one stage on its way toward usableness, as in the case 
of grain or live stock. The mining industry brings the crude 
ore, which is not usable, into a condition where it is either 
usable or at least one stage nearer usability. 

Secondary industries. The secondary industries are those 
which take the products of the primary industries which are 



ECONOMIC ACTIVITIES 



51 



in need of further modification and carry them through the 
remaining stages on their way to final usability. The iron ore, 
for example, must be worked over many times before it be- 
comes an automobile or the blade of a pocketknife. The coal 
must sometimes be transported long distances before it can 
warm our houses. The farmer's grain, besides being transported 
long distances from places where there is a surplus to other 
places where there is a shortage, must also be stored from 
threshing time until it is needed by the consumers, and it must 
be ground into flour and baked into bread or manufactured into 
some other form of food before it is ready for use. 

Services. Personal and professional services include all lines 
of work which do not directly produce salable commodities. 
Lawyers, doctors, preachers, teachers, actors, barbers, and even 
policemen and congressmen, besides multitudes of others, are 
performing professional and personal services. Their labor has 
sometimes been called unproductive labor, merely on the ground 
that it does not produce vendible commodities. Though the 
writers who apply that term to them do not mean to cast any 
reflection upon them, always being careful to state that "un- 
productive" does not mean useless, nevertheless it seems better 
to avoid the use of a term which is so easily misunderstood. 
The important distinction is not that between productive and 
unproductive labor but between the economical and uneconom- 
ical ways of acquiring wealth. Even though the labor of the 
policeman does not directly produce a commodity, as the labor 
of a shoemaker does, for example, nevertheless the shoemaker 
and every other honest worker is helped to work better by the 
law and order which a good police system helps to support. 
They are helped also by the physician, the teacher, and others 
who labor in the field of direct professional service. There is 
an ancient story of some musicians who formed a part of a 
captured army. They requested that they be set free by their 
captors, on the ground that they had not taken part in the fight- 
ing. The captors replied, " By your music you inspired others to 
fight ; therefore you must be treated as though you were your- 



52 PRINCIPLES OF NATIONAL ECONOMY 

selves fighters." By a similar line of reasoning it could be said 
that if musicians inspire others to work, they are themselves 
workers and are contributing their part toward the national 
prosperity. Any of these economic activities may be carried on 
either competitively or cooperatively. The basis of competition 
is found in the conflicting desires of mankind, and these desires 
come into conflict mainly because of scarcity. 

Honorable activities. It has been suggested already that 
certain activities may be both pleasurable and productive. It 
should be added that they may also be highly honorable and 
bring a great deal of social esteem to the producers. In fact, the 
highest prosperity can never be achieved by any nation that 
does not manage to make productive action both pleasurable 
and honorable. If the three classes of activity are always 
sharply distinguished and never combined, the nation will al- 
ways be poor. 

If, for example, all genuinely productive work should be held 
in low esteem by the people, and if their habits of mind were 
such as to make it impossible for them to derive any pleasure 
from productive work, they would always suffer from a dearth 
of material goods. No one would then do productive work 
except under the stress of want or the motive of greed. But if 
productive work is held in high esteem, and if the habits of 
mind of the people are such as to enable them to derive a great 
deal of their pleasure from productive work, it is certain that a 
great deal of productive work will be done. Men will not need 
to spend so much time in mere self-enjoyment, because they 
will get a certain amount of enjoyment from their productive 
work ; neither will they be tempted to abandon productive work 
in order to win esteem or popularity in other ways. In short, 
they will have three motives to work, instead of one, and will 
work harder, produce more goods, win more esteem, and have 
a better time in consequence. 

Attitude toward work. One of the most important differences 
between the prosperous and the unprosperous nations is found 
in this attitude toward work. The unprosperous nations are 



ECONOMIC ACTIVITIES 53 

generally found to have many holidays and to spend a great 
deal of their time and energy amusing themselves in unproduc- 
tive ways. It seems logical to them to do so and illogical to 
work when they might enjoy themselves. It does not seem to 
occur to them that there can be such a thing as enjoying work. 
Any nation that has ever grown really prosperous has had, at 
least in its days of growth, many working days and few holi- 
days, has managed to take a great deal of joy and pride in work, 
and work has been held in high esteem. 

Even in the most industrious nations there are always demor- 
ahzing tendencies. One result of prosperity is to make people 
desire more expensive amusements as well as more costly goods. 
There is a tendency to multiply holidays, shorten the working 
day, the working week, or the working lifetime, and, in general, 
to turn from work to other things for pleasure. 

Joy in work. Why work longer when we have goods enough, 
is a common question. If one is so constituted as to be unable 
to see that work may itself be a pleasure, there is no answer that 
will satisfy him. What he needs is not argument but a change 
of heart, — a new outlook on life, a new sense of value. Until 
he can be made to feel pleasure in work no reasoning will 
convince him. 

Men who do not feel pleasure in work will naturally, as soon 
as they are prosperous enough, work less and spend more time 
in pleasurable but nonproductive activities. Having builded 
their barns larger and filled them with good things, they will 
say, ^'Soul, thou hast much goods laid up for many years; 
take thine ease, eat, drink, and be merry"; that is, they will 
lose their souls. But men who can and do take pleasure in their 
work behave in a very different way. It makes a vast difference 
in the prosperity of a nation whether its citizens generally 
behave in the one way or the other. If they generally stop 
producing as soon as they have their barns full, the pros- 
perity of the country is limited by that fact ; but there is no 
conceivable limit to the prosperity of a people who enjoy 
their work. 



54 



PRINCIPLES OF NATIONAL ECONOMY 



Preferring the other man's work. Another demoralizing tend- 
ency is that of disliking one's own work and imagining that 
some other kind of work would be much pleasanter. They who 
have to do work requiring great discretion sometimes grow 
weary of thinking perpetually about one puzzling question after 
another and imagine -that they would enjoy routine work that 
did not require much thinking, while those who grow weary of 
routine work imagine that they would enjoy work that required 
hard thinking. They who have to carry heavy responsibilities 
imagine that they would enjoy work that involved no responsi- 
bility, while those who carry little responsibility long for more. 
Sentimentalists sometimes excuse themselves and others for 
disliking their work by contrasting it with what they style 
creative work. This term has never been satisfactorily defined 
and probably means little more than pleasant work, and to 
use it in this sense is to beg the question. All productive work 
is creative in the best sense. 

Quite as demoralizing as the tendency to separate all work 
from all- pleasure, or to regard all work as irksome rather than 
pleasant, is the tendency to separate estimable from productive 
work. This tendency shows itself wherever productive effort 
is held in low esteem and other activities in high esteem. There 
have been men who have won a certain kind of applause by 
boasting that what they were doing was of no use to anybody. 
It is not uncommon to speak disparagingly of mere business or 
industry as contrasted with some of the ornamental callings, 
and of those who produce the goods which we like to consume 
as mere Philistines. With the best of intentions, even certain 
kinds of highly useful work are sometimes called social service 
to distinguish them from other kinds of useful work, to the 
disparagement of the latter. Some kinds of work may be more 
productive than others, but all productive work is social service, 
and there ought not to be any such distinction. 

Social service. Probably the highest form of social service 
is found in the ordinary productive business enterprise, though 
it is not, of course^ the only form. If we assume that people 



ECONOMIC ACTIVITIES 



55 



know what they need, it is seldom necessary to call upon philan- 
thropy to provide for their needs. Business or politics will 
supply them quite as effectively as philanthropy possibly could. 
In those cases, however, where people do not know their own 
needs neither business nor politics will supply them, for the rea- 
son that people will neither pay the business man nor vote for 
the politician who attempts to supply them ; nor will they show 
esteem for the person who tries to do for them that which they 
do not desire to have done. If such needs are supplied at all, 
they must be supplied on a philanthropic basis by people who 
do not expect either money, votes, or social esteem for their 
work. 

The following outline will show with a fair degree of clear- 
ness the dividing line between philanthropic service and 
nonphilanthropic service. 

' In which the people's de- f Desires, supplied bv^ „ ,. . 
, , ' rr J ^ Politics 

sires are opposed to J ^, , ,.,,,.,, 

, . , 1 Needs, supphed by philanthropy, 

t there being no effective demand 

In which the peo- f 



The Field 

OF 

Service 



pie's desires are i Desires 
the same as their 1 Needs 
[ needs * (^ 



„ , f Business 

Both sup- „ ,. . 
r H h 1 Po'^^i'^s 
P '^ ^ [ Philanthropy 



Philanthropic service. If people do not know what they 
really need, and you happen to know better than they, you will 
have two widely different opportunities before you — one in the 
field of business or politics and the other in the field of philan- 
thropy. On the one hand, you may look at the problem as a 
business man or a politician would. You discover that the 
people have certain desires for which they demand the means 
of satisfaction. As a business man or a poHtician you need 
not inquire whether they ought to have the things they desire 
or not. You will realize that they will pay for these things or 
that they will vote for the politician who supplies them, even 
though they receive harm from what they get. On the other 
hand, you may approach the problem as a philanthropist and 



56 PRINCIPLES OF NATIONAL ECONOMY 

attempt to give the people what they really need rather than 
what they desire. The people will not pay you for your service, 
they may even resent it; nevertheless you will be rendering 
them a real service. 

Nonphilanthropic service. If, however, the people really 
know what they need (that is, if their desires are the same as 
their needs), then it will not make much difference whether 
you are a business man, a politician, or a philanthropist ; you 
will do much the same thing in either case. Since they desire 
what they need, you can prosper as a business man by supplying 
their needs. You can prosper as a politician also, but in either 
case you will do the same for the people that you would if 
you were a philanthropist and cared nothing for either money 
or votes and were actuated solely by good-will and benevolence. 

The large principle involved here is simply that when people 
know what they need, business and politics, as well as philan- 
thropy, may supply those needs. When, however, their needs 
are opposed to their desires, business and politics are both very 
different from philanthropy. In this case neither business nor 
politics can properly be called social service, only philanthropy 
is really and genuinely serviceable. Generally speaking, how- 
ever, it is probable that men can be trusted to know their own 
needs. In so far as this is true, business and politics are just 
as serviceable as philanthropy and deserve quite as well the 
name of social service as any kind of philanthropy. 

Where men know their own needs. Let us consider rather 
carefully the field of service wherein needs and desires coincide. 
This is the field of worthy business enterprise and of construc- 
tive politics. In this field the selfish business man and politi- 
cian will do very much the same things that a philanthropist 
would do, the only difference being that the business man or 
the politician may accept a reward in the form of money or 
votes, whereas the philanthropist would not. 

Suppose you are a pure philanthropist with no selfish mo- 
tive whatsoever and are looking, about for an opportunity to 
be of service to your fellow men, but you. have, chosen sortie 



ECONOMIC ACTIVITIES 



57 



form of service which consists in supplying needs of which the. 
people are fully conscious and appreciative. The market de- 
mand will be a pretty good indication as to what people need. 
It will indicate where the most pressing need is and where 
there is the greatest scarcity of service. As a philanthropist, 
you should seek to perform some service of which there is a 
pressing need because of its scarcity, rather than to perform 
some service for which there is no pressing need because of its 
abundance. If you find, for example, that the supply of 
farmers, relative to the demand, is small, and that the supply 
of servants in any other field which you are capable of enter- 
ing is pretty well supplied already (is large), it would then be 
your duty as a philanthropist to become a farmer rather than 
to enter one of the other occupations. If, having become a 
farmer, you find that certain crops are already well supplied, 
so well supplied that there is no pressing need for a larger 
supply, but that there is one crop which is undersupplied, so 
much so that there is a pressing need for more, as a philanthro- 
pist you should grow this crop which is scarce. It will be 
noticed, however, that in making these two choices you will 
be choosing exactly as a business man would who was seeking, 
not philanthropy, but profit. 

Where men are most needed. Again, if you were to decide 
to go into a highly organized industry which required a great 
many different kinds of skill or talent, ranging all the way from 
unskilled muscular labor up to the higher forms of business 
management, you would have a new problem, — that of choos- 
ing the kind of work which you would do or the kind of skill 
which you would develop. If you had it in your power to do 
any of the many kinds of work required, you would, as a 
philanthropist, choose the one in which men were most scarce 
rather than any kind of work for which there were already 
plenty of men. Or, if your talents were such as to enable 
you to choose among any two or three kinds of work, you 
would have to choose in the same way. As a philanthropist 
you would have to enter on that occupation in which there 



58 PRINCIPLES OF NATIONAL ECONOMY 

was the most pressing need for more men. In this case, how- 
ever, your choice as a philanthropist would be identical with 
your choice if you were not a philanthropist but were looking 
for the highest possible wages or salary. 

If, however, you made a different choice, you would not be a 
good social servant, or you would not be performing your maxi- 
mum social service. If there is one kind of work for which 
there are already a great many men available, the question of 
one man more or less in that occupation would make very little 
difference. Your contribution to the total production would be 
very slight if you crowded into that already overcrowded occu- 
pation; in fact, your contribution might be nil, because you 
might merely crowd out another man. Your only opportunity 
for genuine service would be to find an occupation so under- 
crowded as to make it very important that more men should 
enter it. If you enter such an occupation, you will be doing 
vastly more for the community or for the industry than if you 
enter an occupation where you are not very much needed be- 
cause of the existing oversupply of labor. 

Even after you have decided to enter an occupation where 
you are very much needed, you still have another problem 
before you. Will you contribute your services gratuitously or 
will you accept the high wages offered ? Even as a philanthro- 
pist it is by no means certain that you should work gratuitously. 
It is quite possible that you could do more good by accepting 
the high wages and using the money in some other way than by 
working gratuitously. On the whole, it would probably be a 
safer kind of philanthropy for you to accept whatever wages 
your work would bring and then use your money constructively. 

To invest or to give, that is the question. But even after you 
have accepted your wages you have money to spend construc- 
tively; you still have other serious problems. As a philanthro- 
pist you can doubtless do some good by spending your money 
charitably, but that is not the only way in which to do good 
with money. It may be, and frequently is, better to invest your 
money in some new industry than to give it away in charity. 



ECONOMIC ACTIVITIES 59 

If by investing it in a new industry you can build or help to 
build a new factory which will employ a number of men, it is 
probably better for those men to be so employed than to receive 
the money as a gift. Besides, when they are so employed, they 
will be producing more goods for the rest of the country and 
tending to make the country more prosperous. The only condi- 
tions under which it would be advantageous to give your money 
away charitably would be when it would take care of people 
not capable of working in your factory or any other factory, 
or doing any other kind of productive work. So long as there 
are such people in the world they will have to be taken care of, 
and there is room for charitable giving; but for able-bodied 
people, capable of working, it is much better for them that they 
be employed in some kind of productive work, and very much 
better for the rest of the world at the same time. 

Because of the great fact of scarcity, it is absolutely certain 
that human interests and desires will frequently come in con- 
flict. When there is not enough of a certain thing to go around 
and satisfy everybody, it means that if one person gets all he 
wants others must necessarily get less than they want. This 
conflict of interests will give rise to some kind of rivalry, 
struggle, or competition. What form this struggle will take will 
depend a great deal upon the laws and regulations of the coun- 
try and the moral and religious development of the people. 
The outline on page 60 indicates the chief forms of struggle or 
of the acquisitive activities. 

The struggle for existence. It is a common error to speak 
of competition as though it were synonymous with war or with 
the struggle for existence as it is carried on among brutes. 
That it is a form of conflict there can be no doubt, nor can it 
be denied that it is a phase of the all-but-universal struggle for 
existence. But there are many forms of conflict besides war, 
and there are many ways of struggling for existence without 
resorting to the destructive methods of brutes. 

Various forms of conflict. The methods named in the out- 
line on page 60 may be explained and illustrated as follows : By 



6o 



PRINCIPLES OF NATIONAL ECONOMY 



Methods of 
Struggling 

FOR 

Existence 



Destructive^ 



Deceptive 



rWar 

Robbery 

Dueling 

Sabotage 
^ Brawling 
Thieving 
Swindling 

Adulteration of goods 
[_ False advertising 

{Courting for royal favors 
Courting the sovereign people 
Campaigning for office 

„ . f Polite social intercourse 
Erotic-^ „ 

t Courting 

. , f Advertising 
CommerciaH ^ , , . 

1^ Salesmanship 

J " Leaving it to the crowd " 

-* " ' \ Litigation before courts 

Productive / ^'""^^'y ^" producing goods 
I. Rivalry in rendering service 



Persuasive -< 



destructive methods are meant all those whereby one succeeds 
by virtue of one's power to kill, to hurt, or to inspire fear of 
physical injury or pain. "War," "robbery," "dueling," "sa- 
botage," and "brawling" are names for methods of destruction 
as carried on by human beings; but it must be remembered 
that animals also kill, rob, inflict injury, and inspire terror. By 
the deceptive methods are meant all those by which one suc- 
ceeds by virtue of one's power to deceive, to swindle, or to 
cheat. Animals practice deceit, though we do not call their 
forms of deceit by such names as "swindling," "counterfeit- 
ing," "adulteration of goods," etc. By the persuasive methods 
are meant all those methods whereby one succeeds by virtue of 
one's power to persuade or to convince. One may beat one's 
rival by being a more persuasive talker, whether one is striving 
for favors from the sovereign person or from the sovereign 
people, whether one is striving for the hand of a lady, the deci- 
sion of a jury, or the trade of a possible customer. This form 
of conflict would remain even if we could eliminate all other 



ECONOMIC ACTIVITIES 6i 

forms. Even under the most complete form of communism 
there would remain abundant room for the persuasive forms 
of conflict. By the productive methods are meant all those 
methods whereby one may beat one's rivals, or gain advantages, 
by virtue of one's power to produce, to serve, or to confer 
benefit. 

The same persons may resort to more than one of these 
methods in order to gain an advantage. When two farmers 
compete in growing crops they are struggling for existence, or 
for economic advantage, by a productive method. When they 
quarrel over a line fence and take their quarrel before a court 
for adjudication, they are struggling by a persuasive method. 
When they secretly alter or remove landmarks in order to gain 
an advantage in their litigation or when they bribe jurors, they 
are struggling by a deceptive method. When they fall to fight- 
ing either with fists or with weapons, they are struggling by a 
destructive method. When they change their methods in the 
order just described, they are sinking lower and lower in the 
scale ; that is, they are resorting to worse and worse methods 
of struggling for existence or advantage. When they rival one 
another in growing corn, there is more corn grown as the result 
of that rivalry ; the country is better fed and everyone is better 
off, except possibly the one who is beaten, and even he may 
very likely be better off than he would have been if he had not 
competed at all. When two farmers quarrel over a line fence 
and take the case into court, no one gains any benefit except the 
lawyers, and what the lawyers gain the litigants lose. No new 
land is created by that conflict. No new wealth is produced. 
The community is no better fed, and the litigants have wasted 
their time. To change from persuasion to deception or from 
deception to physical force is so clearly to sink to a lower level 
that it is unnecessary to pursue the topic further. 

Destructive and deceptive methods of brutes. It will be ap- 
parent to anyone who will study the diagram that among 
animals the destructive and deceptive methods are the charac- 
teristic forms of struggle. They kill, maim, injure, rob, and 



62 PRINCIPLES OF NATIONAL ECONOMY 

deceive one another with no moral or legal restraints. They 
may sometimes rise to the level of persuasion, as in the courting 
process, but never to the level of production ; that is, no animal 
ever tries to beat its rival by producing a larger or better prod- 
uct or rendering a greater or better service. Among human 
beings who have no moral sense and who are unrestrained by 
law and justice the destructive and deceptive methods of strug- 
gle will be followed as well as the persuasive and productive 
methods, but the destructive and deceptive methods of struggle 
are precisely the things that morals and laws are designed to 
prevent. In any civilization worthy of the name and under 
any government worthy to stand overnight men are actually 
restrained, by their own moral feelings, by the respect for the 
good opinions of their fellows, and by the fear of legal penal- 
ties, from attempting to promote their own interests by destruc- 
tion or deception. 

Meaning of crime. To say that men are restrained from 
doing these things is not the same as to say that they are 
absolutely prevented. "Crime" is the name we give to destruc- 
tive and deceptive methods of struggling, and it still flourishes, 
but it must be remembered that what we call crimes for human 
beings are not crimes for brutes, for the simple reason that 
brutes have none of those restraints which men throw around 
themselves. The fact that we call all destructive methods and 
the more grossly deceptive methods crimes and impose penalties 
against them shows that we are trying to raise the struggle for 
existence to a higher plane than that on which it is waged in 
the subhuman world. The aim is to prevent destruction and 
deception and to compel men to succeed, if they succeed at all, 
by persuasion and production. No government, however, is so 
efficient that it can prevent all destruction or deception. "The 
mills of man grind slowly and they grind exceeding coarse.^'' 
Besides, there are some more or less refined methods of decep- 
tion which have not even been declared illegal by legislation. 
If we can so improve our legislation as to prohibit every form of 
deception as well as destruction, and if we can so improve our 



ECONOMIC ACTIVITIES 63 

executive and judicial systems as to prevent absolutely the 
violation of law, we shall have reached the ideal of govern- 
ment control over the struggle for existence. To stop produc- 
tive competition and compel us all to struggle for our own 
advantage by the persuasive methods would be a distinct step 
backward. 

Is it wrong to compete ? There are a few people who object 
on principle to all forms of competition, — who believe that the 
whole competitive system is morally wrong. This feeling, how- 
ever, is probably due to a failure to discriminate, as we have 
tried to do in the preceding pages, between different kinds of 
conflict. The horrors of war and other forms of destructive 
conflict, the petty, skulking meanness which accompanies all 
forms of deceptive conflict, and even the jealousies and heart- 
burnings which result from many forms of persuasive conflict 
have so impressed certain sensitive spirits as to cause them to 
revolt against the very idea of competition in any form. Such 
people ought never to play croquet, because there is competi- 
tion even there. An election is as truly competitive as any 
form of business. 

Universality of struggle. During the entire life of man on 
this planet he has had to struggle in one way or another. The 
reason why we are here today is because our ancestors were 
successful in their struggles. They succeeded in living and 
reproducing their kind in spite of all the enemies and dangers 
which surrounded them. One reason why they struggled so suc- 
cessfully was that they were valiant enough to wage their fight 
with vigor and with spirit. That spirit we have inherited to 
such an extent that we cannot even amuse ourselves without 
some kind of competition or struggle. It is as the breath of 
life to our nostrils. It will be well for us if we can harness this 
spirit to productive work rather than allow it to waste itself 
in destruction, deception, or even in some fruitless kinds of 
persuasion. The nation which succeeds best in so harnessing 
this spirit to production is the nation which should normally 
grow rapidly in wealth, prosperity, and power. 



64 PRINCIPLES OF NATIONAL ECONOMY 

Again, the great fact of scarcity, together with the fact, 
pointed out in Chapter II, that we all prefer some people to 
others, makes some form of competition inevitable and eternal. 
As pointed out in Chapter II, when there is not enough of a 
certain thing to go around and satisfy everybody, all those who 
prefer themselves and their own families to their rivals and 
their families will struggle to get their share of the scarce arti- 
cle. When there are not enough to the high offices to go around 
there will be a similar struggle to get them. These facts have 
always been present in human society and always must remain, 
from the very nature of man and of the universe in which he 
finds himself. From the very nature of the case we cannot all 
be leaders. If we were there would be no followers. We would 
all rather lead than follow; we would rather command than 
obey. Therefore we shall always struggle for leadership and 
command. Nor can there be wealth enough to go around and 
satisfy everyone. If there were, wealth would cease to exist as 
wealth. Whenever you find a thing so abundant as that, it has 
ceased to count as wealth. Only those things are wealth of 
which we can say that more is better than less. So long as we 
would rather have more of a certain article than less of it we 
shall strive to get more. Competition, or struggle, is therefore 
unavoidable. The thing to do is to make the most of it and 
to turn it, so far as possible, into productive channels and out 
of the destructive and deceptive channels. 

The spirit in which one competes. In assuming the univer- 
sality and permanence of competition in some form it is not 
necessary to exclude such things as love, friendship, neighbor- 
liness, and cooperation. Competitors in a friendly game may 
be none the less friendly because they are competing. It is only 
when they care more for victory or the prize of victory than 
they do for friendship that there is any conflict between compe- 
tition and friendship. The cure for this, however, is not the 
abolition of competition but the learning to care for the right 
things and to evaluate things properly. When men care more 
for money, which is the prize of economic competition, than for 



ECONOMIC ACTIVITIES 65 

honor, friendship, or justice, then competition is likely to be 
ruthless and destructive. When men care more for offices, the 
immediate prizes of political competition, than for the welfare 
of the country or the peace of the neighborhood, a political cam- 
paign is likely to become a ruthless and destructive game. And 
when football men care more for victory than for sport or 
honor, football becomes a game unfit for gentlemen. In all 
these cases the evil does not inhere in competition itself but in 
the false system of valuations in the minds of the competitors. 
So long as business men realize that there are other things more 
precious than money, so long as politicians realize that there are 
other things more important than winning offices, so long as 
football men realize that there are other things greater than 
victory, all these forms of competition are thoroughly com- 
patible with the most sincere friendship. 

It has been pointed out many times that the struggle for 
the life of others is just as real a fact in life as the struggle for 
the life of self, that mutual aid is as real as mutual antagonism, 
and that cooperation has a place in our economic system as well 
as competition. All this is true, but it must not be allowed 
to obscure the fact that competition is a very real thing also. 
Behind these apparent contradictions lies the very important 
fact that human interests are sometimes harmonious and some- 
times antagonistic, — that they are never wholly one or the 
other. Where the interests of men harmonize there is and 
always will be cooperation, provided they are wise enough to 
understand it; where their interests conflict, there is and always 
will be competition. 

I Cooperation a form of competition. Even cooperation, as 
it is generally practiced, is only a method of competing more 
effectively. There is cooperation among the members of an 
athletic team. Their teamwork consists in working together 
smoothly and effectively; but the purpose of this teamwork, 
or cooperation, is to enable them to compete more effectively 
against the opposing team. It would be difficult to find or to 
name an instance of cooperation which did not, directly or 



66 PRINCIPLES OF NATIONAL ECONOMY 

indirectly, enable the cooperators to compete more successfully 
than they were able to do when working alone as individuals. 
It is really the principle of teamwork applied to business com- 
petition. Within the cooperating group, as within the athletic 
team, competition among members is reduced. But competi- 
tion between cooperating groups, or between the group and 
those outside the group, is quite as sharp as it would be if there 
were no cooperative groups. Again, when a cooperative group 
becomes large, there arises within the group a certain amount 
of competition for offices and other advantages. 

Cooperation is an excellent thing under certain conditions, 
and wherever the conditions call for it every reasonable effort 
should be made to encourage it, but the encouragement should 
be given with a full understanding of its limitations and of its 
real relation to the competitive process. More cooperative 
societies have failed than have succeeded. One of the prin- 
cipal reasons for failure has been that the promoters have 
imagined that there was in cooperation something inherently 
superior to competition and that it ought to be substituted for 
competition anywhere and everywhere. The truth seems to 
be that cooperation is called for only under certain special 
conditions where teamwork is required in order to secure 
large results. 

Where cooperation is successful. A careful study of cooper- 
ation will show that it has seldom succeeded in the field of 
production. Its chief successes have been achieved in mer- 
chandising; that is, in buying and selling. Except among a 
few rehgious societies, which are held together by a powerful 
religious sentiment, the author does not know of a single case 
where cooperative farming has succeeded. By cooperative 
farming is meant the running of the productive work of grow- 
ing crops under a cooperative system. There are' many cases, 
however, in which groups of farmers have cooperated in buying 
and selling, in marketing their products, in purchasing their 
supplies, and in securing capital on advantageous terms. There 
are also many cases in which they have cooperated in running 



ECONOMIC ACTIVITIES 67 

creameries, cheese factories, and grain elevators. These are 
parts of their marketing system. Again, it must be remembered 
that the farmers do not themselves operate these establish- 
ments. They own them and they furnish the capital to run 
them, but they hire others to manage them and to do the work. 
The men who work in these establishments are not cooperators, 
but receive wages and salaries precisely as they would if the 
establishments were owned by private individuals. 

Two fields for business competition. There is a fundamental 
reason why cooperative enterprises have not flourished in the 
field of production as often as they have in the field of buying 
and selling. This reason is found in the two kinds of business 
competition, — competitive production and competitive bar- 
gaining. Competitive production always works well ; competi- 
tive bargaining sometimes works well and sometimes works 
badly. Since competitive production always works well, the 
need for cooperative production is never sufficient to justify its 
existence. No one has a sufficiently strong motive to induce 
him to give his time and energy to the running of a cooperative 
society in the field of production. Since there are no evils con- 
nected with competitive production, there is not enough to be 
gained by cooperative production to lead anyone to sacrifice his 
time and effort in order to make it succeed. 

In the field of competitive bargaining, however, evils fre- 
quently spring up. Where a small and compact body of deal- 
ers are buying from a large and widely scattered body of 
producers, the latter are at a great disadvantage in the bargain- 
ing process. Where this is the case it is necessary for the pro- 
ducers to get together in a cooperative organization in order to 
bargain on equal terms with the dealers. Where there is such 
a need as this someone will have a motive that is sufficiently 
strong to induce him to give his time and attention, to sit up 
nights, to labor in season and out of season, to keep the 
cooperative society together and make it succeed. Without 
some such motive as this, cooperation has seldom or never 
succeeded. 



68 PRINCIPLES OF NATIONAL ECONOMY 

Competitive consumption. There is another kind of com- 
petition which always works badly. It is even worse than 
competitive bargaining. It may be called competitive con- 
sumption. By competitive consumption is meant a rivalry in 
display, in ostentation, in the effort to outshine or to outdress 
all one's neighbors, or at least not to be outshone or outdressed 
by them. This is not business competition, however, though it 
can be called a kind of economic competition. 

From what has been said it will appear that economic com- 
petition is not synonymous with the productive methods of 
struggling for existence as outlined in the beginning of this 
chapter. There is such a thing, it is true, as competitive pro- 
duction; but competitive bargaining is partly persuasive and 
partly deceptive. It is persuasive when it takes the form of 
clever advertising, of expert salesmanship, or of shrewd and 
reasonably honest bargaining ; it is deceptive when cleverness 
in advertising takes the form of artistic lying (of overstating 
the merits of an article advertised) or when expert salesman- 
ship takes the same form. Competitive consumption has no pro- 
ductive features about it. The effort to keep up appearances, 
to dress better than one can afford, to spend money for pur- 
poses of display, are all deceptive, besides being wasteful and 
to that extent destructive. These, however, are among the more 
refined and less repulsive forms of destruction. For this rea- 
son, perhaps, neither law nor public sentiment has condemned 
them very definitely as yet. 

In what fields cooperation may succeed. They who are in- 
terested in promoting cooperation should bear all this in mind. 
It is a waste of time and energy to try to substitute cooperation 
for competition in all cases. In the first place, it cannot be 
done, because so long as people prefer themselves and those 
who are near them to others who are farther from them, com- 
petition in some form will exist. In the second place, even if 
cooperation could be substituted for competition, it would be 
undesirable in many cases, though desirable in others; that is 
to say, there are some cases in which competition works so 



ECONOMIC ACTIVITIES 69 

well that cooperation could not improve upon it. To be more 
specific, competitive production, as stated before, always works 
well. No one has yet succeeded in making cooperation in pro- 
duction, either on a large scale or on a small scale, work suc- 
cessfully for a long period of time. This is not saying that 
producers may not occasionally cooperate, as when farmers 
help one another in special lines of work. In our rural com- 
munities, especially in previous generations, there were many 
barn raisings, log rollings, corn huskings, and other examples 
of genuine and beneficial cooperation. But these events were 
only incidents in a kind of life which remained, in spite of them, 
predominantly competitive. Even competitive bargaining some- 
times works well. Where this is the case nothing is to be gained 
by cooperation, and it is therefore certain to fail, because the 
cooperators will, sooner or later, lose their enthusiasm when 
they see that they are not gaining anything by it ; that is, when 
they see that it is not working any better than competition. 
The would-be cooperators should choose for their field of effort 
some situation where competitive bargaining is working badly. 
There they will have a chance of success. But no cooperative 
scheme runs itself. Even where there is a distinct and un- 
doubted need for it, it will succeed only when some capable 
person gives a great deal of time and study and hard work to it. 
Compulsion versus voluntary agreement. With an unerring 
instinct for economic falsehood a certain class of writers have 
persistently obscured this question of cooperation versus com- 
petition by confusing it with working under compulsion versus 
working under freedom of contract. The Panama Canal was 
not built cooperatively. The government of the United States 
decided to hire others to do it instead of bargaining with con- 
tractors. They who did the work did not cooperate, any more 
than the men who build our railroads and factories or work 
on our streets. If a large number of farmers unite to run a 
creamery or a shoe factory of their own, but do not work in it 
themselves, they sometimes call it a cooperative creamery or 
shoe factory. In reality it is only quasi cooperative. The 



1/ 

70 PRINCIPLES OF NATIONAL ECONOMY 

people who do the work in the factory are hired and have no 
more to say about the management than they would have if 
the factory were owned by an ordinary joint-stock corporation. 
A cooperative shoe factory, of the class which we are now 
discussing, is merely an organization of consumers formed for 
the purpose of bargaining for its shoes more successfully than 
it could do otherwise. It finds that it can bargain directly with 
workingmen, tanneries, and others to better advantage than it 
can bargain with private owners of shoe factories. 

It is particularly erroneous to speak of an army as though 
it were a cooperative body. It works under authority and com- 
pulsion rather than under a system of free contracting. Sol- 
diers do whatever they are commanded to do and not whatever 
they see fit to bargain to do. Experience has shown that armies 
can succeed in no other way. It has shown also that industry 
can succeed on the basis of free contract, under which no one 
does anything until he sees fit to contract to do so. A little 
military experience will thoroughly convince our people that the 
distinction between compulsion and freedom is not the same as 
the distinction between cooperation and competition. 

Cooperation in setting standards of consumption. There is 
always an acute need for a kind of cooperation that can stop 
competitive consumption. Unfortunately that need is not very 
widely understood. One reason why it costs us so much to 
live is that we are everlastingly trying to keep up with some- 
one else. ^^It takes all my income," said a certain congress- 
man, ^Ho keep up with my fool neighbors." He was expressing 
in this picturesque manner one of the profound facts of our 
economic life.^ The things which cost us so much money are 
not the things which we prize for their own sakes, but the things 
which we feel that we must have because cur neighbors have 
them. We are, each of us, trying to live up to a standard set 
by someone else. Rich and poor alike are afflicted by the same 
disease. The rich are doubtless more to blame than the poor, 
but the poor cannot escape all blame. If they would try to live 

1 Compare also Mr. Irving Bacheller's book entitled " Keeping up with Lizzie." 



ECONOMIC ACTIVITIES 71 

rationally and not try to keep pace with someone else a little 
richer than themselves, they would not find it so hard to make 
both ends meet. A little cooperation among themselves, in the 
way of setting their own standards of dress and fashion, would 
be a great help. If, likewise, the well-to-do would not try to 
imitate those still richer, they could be saved much worry and 
vexation of spirit. The individual finds himself almost helpless. 
''As well be out of the world as out of style" is a saying which 
pretty well sums up the situation so far as the individual is con- 
cerned. But a large group of people who would cooperate in 
the work of setting their own styles need not be either out of 
style or out of the world. Educated people who see the prin- 
ciple involved should take the lead. In so doing they would 
not only be doing themselves a favor but they would be con- 
ferring a priceless benefit upon the whole nation. 



CHAPTER V 

CONTROL OF ECONOMIC ACTIVITIES 

Acquisitive activities. In the classification of acquisitive ac- 
tivities (p, 60) it was pointed out that there is a very impor- 
tant difference between economical and uneconomical methods 
of acquisition. It is highly important, therefore, from the 
standpoint of the nation's welfare that the uneconomical meth- 
ods of acquisition shall be suppressed and the economical 
methods encouraged. Any individual who uses his time and 
strength in acquiring wealth uneconomically is not only going 
to waste himself, and therefore wasting the resources of the 
nation, but he is likely also to cause others to waste their time 
and energy in protecting themselves against him. This also is a 
loss to the nation. But if everyone can be induced to try to 
get what he wants by producing it or rendering a service to 
somebody else, then everyone will have a very strong motive 
for producing and serving. When everyone is doing his utmost 
to produce or to serve, the nation is very prosperous. 

Methods of control. This consideration alone makes it neces- 
sary that there shall be some way of controlling the acquisitive 
activities of individuals. There are two somewhat widely differ- 
ent methods of controlling the individual. One is to control him 
by force, or at least the threat of force. Offering him full 
opportunity to enjoy the product of his own labor or the wages 
of his service means that others must be forcibly restrained 
from interfering with his enjoyment or depriving him of his 
possession. He, in turn, must be forcibly restrained from in- 
terfering with others who are trying to produce useful things, 
to render useful service, and to enjoy the fruits of their produc- 
tion or service. The agency which exercises this kind of con- 
trol is called government. 



CONTROL OF ECONOMIC ACTIVITIES 73 

The other method of controlling is to appeal to the good-will 
of the individual or to his desire for the good opinion of his 
neighbors. If he can be made to feel kindly disposed toward 
all his neighbors and fellow citizens, he is not likely to engage 
in any acquisitive activity which is harmful to them. Likewise, 
if he cares for their good opinion he will refrain from harming 
them in any way. If his own good-will is intelligently directed 
and if their good opinion and esteem are wisely exercised, he 
will have other encouragement to be useful to his neighbors 
and fellow citizens. This means that he will produce such 
things as they would like to have or render such services as 
they desire. However self-interested he may be he will prefer 
to prosper by these methods rather than by harmful methods. 
In short, he will prefer those acquisitive activities which we 
describe as economical in the diagram referred to and avoid 
those that are harmful. 

In the diagram on page 60 there is a classification of meth- 
ods of struggling for existence. The destructive and deceptive 
methods correspond to those acquisitive activities that are un- 
economical and harmful. Productive methods of struggling for 
existence correspond to those acquisitive activities that are 
economical. The persuasive methods of struggling for exist- 
ence are probably, on the whole, economical rather than un- 
economical, though in many cases they probably overlap. So 
far as law and government, with their clumsy methods and 
reliance upon force, can control the methods of struggling for 
existence, they must draw the line in that diagram between de- 
ceptive methods on the one hand and persuasive methods on 
the other, forbidding all destructive and deceptive activities 
and permitting or encouraging the persuasive and productive. 
This is what is meant by suppressing violence and fraud and 
permitting discussion, persuasion, and argumentation as well 
as production. Morals and religion, however, may go a little 
further and discourage certain forms of persuasion which over- 
lap somewhat on the field of uneconomical endeavor, — dema- 
gogy in politics, too clever and unscrupulous advertising and 



74 



PRINCIPLES OF NATIONAL ECONOMY 



salesmanship, and a good many other persuasive methods that 
shade off into deception. These are undoubtedly uneconomical 
and should be discouraged by any agency that can do so. It is 
difficult, however, for any agency using such a clumsy device 
as force to control individuals or to distinguish sharply between 
the uneconomical and the economical forms of persuasion and 
suppress the former without interfering with the latter. It is 
only when a method is clearly deceptive or fraudulent that the 
machinery of the law can deal with the case. 

The need for law. Law and government have a most impor- 
tant part to p>erform in promoting the prosperity of the people. 
Bagehot^ has said that the first great need of primitive man is 
for law, — definite, concise law. He even argued that it is more 
important that the law be definite and concise than that it be 
just, though it is very important that it be both. It is probable 
that a system of laws which are well understood because they 
are clear and concise and which are regularly enforced without 
variation or favoritism, even though they are in some respects 
unjust, is better for a people than a system of laws which are 
in essence just, but which are not clearly understood and not 
regularly and impartially enforced ; but of course it would be 
still better if they were both just, on the one hand, and clear, 
concise, and regularly enforced, on the other. When everyone 
knows definitely what the law is and knows definitely that it 
will be enforced not only against him but equally in his defense, 
he at least knows what he can count upon. Nothing so dis- 
courages industry and enterprise as uncertainty as to what 
other men are likely to do ; and uncertainty as to the enforce- 
ment of law contributes to that uncertainty as to what other 
men are likely to do. 

The problem as to what the government can do, through its 
laws and its administration, for the promotion of the economic 
prosperity of the people is of the very greatest importance. 
The specific aim should be to call out the very best and most 
productive efforts of every individual. Since the greatest re- 

1 Physics and Politics (fifth edition), p. 21. London, 1879. 



CONTROL OF ECONOMIC ACTIVITIES 75 

source of any nation is the productive energy of the people 
themselves, it follows that the conservation and development of 
that productive energy is the most constructive policy that any 
government can pursue. It also follows that the worst form of 
waste that any government could permit or encourage would 
be the waste of the productive energy of the people. 

The repression of destructive and deceptive action. The first 
and most obvious thing which the government must do is to 
prohibit and prevent all the destructive and deceptive forms of 
conflict as outlined at the beginning of the last chapter. It is 
of the utmost importance that this shall be accomplished ; and, 
what is equally important in determining the duty of the gov- 
ernment, law and government are the only agencies which can 
accomplish it. He who has no moral scruples against pursuing 
his selfish interests by destructive or deceptive methods can be 
restrained only by the superior force of the many as it is ex- 
ercised through the government. If he is allowed to pursue 
his selfish interests by these methods, he not only wastes his 
own powers in unproductive efforts but also tends to destroy 
the products of other people ; and, what is more important, 
he discourages them from further productive effort and thus 
causes their productive powers to go to waste. It may, there- 
fore, be said that, whatever other functions government may 
have, its primary function is to repress the destructive and de- 
ceptive methods of pursuing self-interest. 

The first effect of this repression of the destructive and de- 
ceptive methods is to transform the struggle for self-interest 
from the brutal struggle for existence, where the strong prey 
upon the weak and the ferocious upon the gentle, into a struggle 
wherein the persuasive and the productive triumph over the 
unpersuasive and the unproductive. If it were possible (and 
it probably is) to carry this repression still farther, and not 
only to eliminate all destruction and deception but also to 
eliminate from persuasion all demagogy, all appeal to passion, 
everything, in fact, except the appeal to reason and justice, 
then it would be literally true that reason would everywhere 



76 PRINCIPLES OF NATIONAL ECONOMY 

triumph over unreason, justice over injustice, usefulness over 
uselessness, and productiveness over unproductiveness. Under 
such a government each and every one would succeed in getting 
what he wanted in exact proportion as he contributed to others 
what they wanted ; the most useful would be the most success- 
ful, and the indispensable man would be the great man. In that 
situation we should have a literal fulfillment of the words 
'^ Whosoever will be chief among you, let him be your servant." 
And a servant is not necessarily one who comes at your beck 
and call to do your bidding ; he may be merely the one who 
does you a service or who produces what you need. 

Nothing could be more favorable to the prosperity of a 
nation than a general following of such a rule. If we could 
conceive of a nation in which no one could gain anything except 
by producing an equivalent or by contributing an equal amount 
to the prosperity of someone else, then the more ardently every- 
one strove to better his own condition the more ardently would 
he be striving to better the condition of someone else, driven 
thereto not by benevolence or philanthropy but by self-interest. 
Then the more people there were striving to acquire wealth 
the more there would be striving to produce it and the more 
ardently they desired to acquire it the more ardently they 
would labor to produce it. Such a nation would certainly 
prosper out of all proportion to a nation in which destructive 
and deceptive methods were practiced by a large proportion of 
its people. 

Two ways of promoting the productive life. There are two 
conceivable methods by which such an ideal might be realized : 
one is such a perfection of the moral nature of every person in 
the nation as to make him unwilling to gain anything without 
producing it or its equivalent or rendering a service of equiva- 
lent value ; the other is such perfection of law and government 
as to make it impossible for anyone, however much he desired 
to do so, to gain anything without producing it or its equivalent 
or rendering an equivalent service. In neither case would it 
be necessary for men to cease caring more for themselves and 



CONTROL OF ECONOMIC ACTIVITIES 



77 



their own families and neighbors than for other men and their 
famines and neighbors. In neither case would it be necessary 
to do away with competition or the struggle for individual gain. 
It would only be necessary so to hedge men about, either by 
moral restraints or by positive laws, as to compel them to com- 
pete fairly, always giving an equivalent for everything they get. 

It must not be hastily assumed that the repression by the 
government of the destructive and deceptive methods of acquir- 
ing possession of desirable things is merely negative work. By 
this kind of repression every producer is protected in the 
possession and enjoyment of the fruits of his own productive 
effort. Knowing that he will enjoy the full advantage of his 
own industry, enterprise, and foresight, he will have the strong- 
est kind of motive for exercising these virtues to their full 
capacity. This lets loose the productive energy of the people 
in a way which would be impossible without the protection of 
law and government. The kind of people who build civiliza- 
tions can be trusted to take the initiative and start all sorts of 
productive enterprises if they are thus safeguarded. There is 
nothing any more positive and constructive than the free spirit 
of a vigorous race of people when they are left to direct them- 
selves in the field of production, but are restrained from enter- 
ing the fields of destruction and deception. They can safely be 
intrusted with the task of looking after themselves if those who 
are criminally inclined can be prevented from interfering with 
them. Give the people confidence in the justice and efficiency 
of the government and in one another, and their own productive 
virtues will develop, their industrial power will multiply itself, 
and the prosperity and power of the nation will be assured. 

Confidence and economy. Confidence is one of the greatest 
of all economizers of human energy. Its greatest value is not 
in the stability which it brings to the financial market, though 
that is very fmportant ; it is found rather in the unshackling of 
enterprise which results from confidence in the government and 
in one's neighbors and fellow citizens. The average citizen has 
more points of contact with his neighbors, his associates in 



78 PRINCIPLES OF NATIONAL ECONOMY 

business, and his fellow citizens than with the government or 
the financial market. It is in these numerous points of contact 
and in the vast sum of these dealings of man with man that 
confidence produces its greatest economies, and its lack the 
greatest waste. 

Professor E. A. Ross, in his book entitled "The Changing 
Chinese," mentions certain bad neighborhoods in China where 
the farmer must guard his rice field every night to keep his crop 
from being destroyed or stolen. The energy that is wasted 
when so many people stay awake every night must be stupen- 
dous, but this waste is a trifling matter compared with the dis- 
couragement and lack of enterprise which result from the 
feeling of uncertainty which such lawless conditions beget. Un- 
less we have at some time been confronted by the same or a 
similar situation, we can hardly realize how much energy we 
save by being able to sleep at night in confidence that the 
products of our labor will not disappear before morning. 

Before we expend too much sympathy on those Chinese farm- 
ers we should consider the condition of the fruit growers, 
gardeners, and farmers in the neighborhood of some of our 
large towns. Unless one is very favorably situated with respect 
to police protection, one is frequently compelled to keep a 
watchman or else to expose the entire produce of his toil to the 
depredations of town marauders. Even though these marauders 
are generally thoughtless rather than vicious, their work is just 
as expensive to the producer as though they were degenerate 
criminals. They occasion the same economic waste and dis- 
couragement; they therefore detract just as much from the 
national efficiency and add just as much to the cost of the neces- 
saries of life for all classes, the very poor as well as the very 
rich. Their depredations are especially disastrous to the family 
garden, where the owner cannot afford to hire a watchman and 
is himself engaged in other work which makes it necessary for 
him to sleep at night. 

Observance of law a patriotic duty. There are three reasons 
for choosing the orchardist end the gardener as examples of 



CONTROL OF ECONOMIC ACTIVITIES 79 

producers who gain through a government and a community in 
which they can have confidence, and lose through a government 
and a community in which they can have no confidence. In 
the first place, it is so obvious that it does not have to be proved 
that these men are producers who contribute certain vital neces- 
sities to the prosperity and well-being of the whole community, 
and that the community gains when they are successful and 
suffers when they are unsuccessful. In the second place, cer- 
tain young persons who read this book may know something at 
first hand about the troubles and discouragements which those 
producers have. In the third place, it ought to be easy for the 
average person to understand that any act of his which makes 
it uncertain whether or not the producer will reap the rewards 
of his labor is an injury not only to the producer but to the 
consumer and to the whole nation as well, and that, in conse- 
quence, the observance of law and the preservation of order are 
as truly patriotic duties as fighting the battles of one's country. 
Standardization and economy. Aside from police protection 
there are certain other important functions which law and gov- 
ernment can perform better than private individuals or volun- 
tary groups of individuals. One of the most important of these 
is the standardizing of coins, weights, and measures. What- 
ever differences of opinion may exist with respect to other 
functions of government, little is said or to be said against 
coining money and fixing the standards of weights and meas- 
ures.^ Though these two functions are grouped together in the 
same clause of our federal constitution, it is doubtful if it is 
generally understood what a close connection there is between 
them. Both result in great economy of effort in the transfer of 
goods. The economy involved in transferring coined money 
instead of uncoined metal is apparent. Coining the metal by a 
reliable and responsible government merely gives the public 
confidence in its weight and fineness. When it is once coined it 
is enabled to pass from hand to hand without the labor of in- 

iSee the author's articles on "Standardization in Marketing," Quarterly 
Journal of Economics, February, 191 7. 



8o PRINCIPLES OF NATIONAL ECONOMY 

spection on the part of everyone who receives it. Otherwise the 
receiver would always have to weigh it to determine its quan- 
tity and test it to determine its quality. When it is coined it 
^^ sells" (if we may speak of selling money) on grade and repu- 
tation rather than on inspection. Confidence is what makes it 
sell on grade and reputation ; lack of confidence would necessi- 
tate inspection, — that is, weighing and testing, — which would 
be very wasteful of time and labor. 

Selling on grade rather than on inspection. By the process of 
standardization any other commodity may also sell on grade 
and reputation rather than on inspection. This also would be 
economical and, as in the case of coin, would be a result of 
confidence. All civilized governments have done something to- 
ward standardization and the establishment of confidence by 
fixing uniform standards for determining quantity ; that is, by 
fixing standards of weights and measures. In proportion as 
these standards are fixed and enforced by law we save time and 
energy in transferring goods. If it were possible to go farther 
and fix and enforce standards of quality as well as of quantity, 
still greater economies would be effected. 

Individuals and firms have sometimes succeeded in standard- 
izing their goods, both as to quantity and as to quality, so 
effectively that buyers can buy on grade and reputation rather 
than on inspection. Whenever individuals or firms succeed in 
inspiring such a degree of confidence, it generally increases 
the salability of their goods. It saves the purchaser some time 
and trouble, and he is usually willing io pay something for that 
saving. Only the government, however, can enforce uniform 
standards among all producers and all dealers. 

Not the least of the advantages of a minute division of 
labor ^ is the fact that each individual can avoid the necessity 
of being expert in many things and therefore has time to be- 
come a specialist in one thing. One of the advantages of stand- 
ardizing commodities is that the average consumer can save 
himself the trouble of being an expert buyer or an expert judge 

iSee Chapter X, on The Division of Labor. 



CONTROL OF ECONOMIC ACTIVITIES 8 1 

of the many things which he has to purchase. If he has con- 
fidence not only in the weights and measures but also in the 
government which standardizes and the seller who uses them, 
and if he has the same degree of confidence in the alleged qual- 
ity of the goods offered for sale, he may make his purchases 
with very little expenditure of time and strength and save his 
time and strength for his own special work. 

Enforcement of contracts. The enforcement of contracts and 
agreements is another way of creating confidence and, through 
the creation of confidence, of economizing energy and encourag- 
ing production. Where men commonly regard contracts as 
scraps of paper and do not solemnly and completely fulfill them, 
and where law and government fail to compel their literal ful- 
fillment, there would, of course, be great difficulty in working 
together in productive enterprises. 

The exercise of authority. It is clear, therefore, that one 
very important function of government is to create that state 
of confidence which results in economy, and to create it, first, 
by repressing destruction and deception through the poHce 
power of the state, second, by standardizing products, and, 
third, by enforcing contracts. These tasks, which are neces- 
sary in the interest of the highest economy, are thrown upon 
the government because no other agency is in a position to 
perform them. They call for the exercise of authority, backed 
up by physical force, and that is a work which can be intrusted 
to no private agency. 

Producing nonmarketable utilities. We need not limit the 
functions of government, however, to those requiring the ex- 
ercise of authority, though usually it will be found that the 
government is best fitted to perform those which require some 
degree of authority, whereas private individuals and organiza- 
tions can usually be intrusted with those enterprises which can 
be carried out wholly on the basis of free contract. This dis- 
tinction is not always clear, but a little careful study will 
usually reveal the fact that there is an element of compulsion 
in those enterprises which the government carries on most sue- 



82 PRINCIPLES OF NATIONAL ECONOMY 

cessfully. The maintenance of lighthouses will serve as an 
illustration. If a private company were to maintain light- 
houses, its product (light) would be difficult to sell. The light 
would shine for all who came within its reach, and the ship- 
owner who refused to pay for it would get the same advantage 
as the one who paid his share. All who get the benefit should 
be compelled to pay a share of the cost, either in the form of 
taxation or in some other form. This requires a power of com- 
pulsion which the government alone possesses. 

Even in the case of the post office, as it is thought best to run 
it, there is an element of compulsion. Many local post offices 
are maintained at a loss, since there is not local business enough 
to pay expenses. Under private management these local offices 
would be closed, unless the people of the neighborhood would 
voluntarily pay enough postage to cover expenses or unless 
larger communities would voluntarily pay enough surplus to 
cover the losses on the smaller offices. It is deemed expedient 
to establish a uniform rate, regardless of differences in the cost 
of service. Some people are therefore compelled to pay more 
than the cost of the service which they receive, in order that 
others may get their service for less than it costs. No one com- 
plains of this ; but it is apparent that it could not be carried on 
in this way on the basis of free contract. Some degree of com- 
pulsion is necessary in order to compel some people in some 
localities to pay higher rates than are necessary, — higher than 
they would have to pay if they were permitted to patronize 
private postal carriers. The good of the whole country seems 
to demand that this be done. The government alone can ex- 
ercise the necessary authority, since it is sometimes thought 
best even to compel the people to pay in the form of taxes 
enough to cover the losses on the postal business. 

However, we need not hold to any hard-and-fast definition 
of the functions of the government. It is sufficient to say that 
anything is a proper task for the government if there is a rea- 
sonable ground for believing that the government can do it 
better and more economically than private enterprise can rea- 



CONTROL OF ECONOMIC ACTIVITIES 83 

sonably be expected to do it. That reasonable ground exists in 
favor of government enterprise whenever authority or com- 
pulsion is necessary to its successful accomplishment. When 
there is no need whatever for compulsion (that is, when every 
part of the work, including the selling of the product, can be 
conducted on the voluntary basis of free contract), the general 
tendency is to leave the task to private enterprise. 

Beneficent uses of power. There is a wide difference, how- 
ever, between using force to compel a man to do something 
which he has voluntarily contracted to do and using it to com- 
pel him to do something which he has never agreed to do and 
would prefer not to do. As a matter of observation it will be 
found that most if not all of the things which the government is 
able to do well involve some element of compulsion of the latter 
kind. Public education will serve as an example. Wherever it 
is a success there is either compulsory attendance or compulsory 
payment or a combination of both. In the lower grades of our 
public-school system we have both. In the higher grades and 
in our state colleges and universities we have compulsory pay- 
ment; that is, the taxing power of the government is used to 
procure the means for the payment of expenses. Both com- 
pulsory attendance upon the lower grades and compulsory sup- 
port of all grades are beneficent uses of the power of the 
government over the individual ; but it must be remembered 
that it is the use of power. There is no reason for believing 
that a government school on a purely voluntary basis would be 
superior to a private school ; that is to say, if both attendance 
and payment were voluntary on the part of individuals, it is 
difficult to see how it could be more successfully managed by 
the government than by some private agency. 

That which is true of public education appears to be true of 
every other enterprise upon which it would be possible for the 
government to enter. The government has no advantage over 
a private individual or a voluntary association of individuals 
except in the use of force or compulsion. That is to say, any 
enterprise which can be carried on on a purely voluntary and 



84 PRINCIPLES OF NATIONAL ECONOMY 

contractual basis, without any use of compulsion except in the 
enforcement of contracts which are themselves voluntarily 
entered into, can probably be fully as well managed by private 
individuals and associations as by the government ; but if any 
degree of compulsion is necessary in order to insure its success, 
it becomes a fit subject for government enterprise. There is 
undoubtedly a large field for the beneficent exercise of compul- 
sion. There is also a large field where freedom and voluntary 
agreements are better than compulsion. If we can locate the 
limits of the beneficent exercise of force, we shall have located 
the limits to the beneficent exercise of government enterprise. 

Human interests sometimes in conflict and sometimes in 
harmony. In a previous chapter it was pointed out that human 
interests are frequently in conflict with one another ; they are 
also frequently in harmony with one another. Where they are 
in conflict (that is, where one man's interest conflicts with 
another's) there is Hkely to be trouble. Only three things can 
prevent uneconomic (that is to say, either destructive or de- 
ceptive) conflict. The first is the voluntary submission of the 
weaker man through fear. That results in despotism. The 
second is such. moral self-restraint on the part of one or both 
as will prevent a quarrel. Willingness to give up not only one's 
coat but one's cloak also would preserve peace. The third is a 
strong and effective umpire who will promptly decide the case 
and enforce his decision upon both parties to the conflict. This 
umpire is the government. 

It will generally be agreed, except by extreme anarchists, 
that wherever human interests come in conflict a strong umpire 
of some kind will be necessary until men are so self-restrained 
by their morals or their religion as to govern themselves. With- 
out such self-restraint the conflict of interests will result in 
the wasting of human life and energy by destructive combats, 
fights, and duels, unless there is a government at hand to settle 
the difference and send the disputants about their business. 

Government control unnecessary where human interests are in 
harmony. But human interests are sometimes harmonious. 



CONTROL OF ECONOMIC ACTIVITIES 85 

When this is the case the individual who pursues his own in- 
terest is also promoting the interest of others. Within this 
field where interests are in harmony it is true, as Adam Smith 
said long ago, that we are sometimes led as by an invisible 
hand to promote the public interests while trying to promote 
our own/ It is to the interest of the farmer to grow good 
crops; it is likewise to the interest of the public to have him 
do so. In this and a vast multitude of other cases the individ- 
ual needs no compulsion to lead him to promote the public 
good. In all such cases it seems to work better in the long run 
to leave the individual very much to himself. The wise govern- 
ment will generally keep its hands off. 

Tendency of government officers to increase their own power 
and importance. There is, however, a natural tendency in all 
human beings to magnify their own power and importance. 
This tendency seems peculiarly strong in that kind of person 
who manages to get elected to public office. Modesty is not the 
outstanding characteristic of the average candidate who seeks 
office, though he may feign it pretty well. The more the gov- 
ernment undertakes, the greater become the power and impor- 
tance of the officeholder. There is, therefore, a strong tendency 
on the part of all successful candidates to extend the functions 
of government. The arguments in favor of this policy as used 
by the elected are sometimes so subtle as to deceive the very 
elect. They are always made as though in the interest of the 
people, though they are really in the interest of the officehold- 
ing class. It is a means of exalting the position of the vote 
getter. It therefore behooves the average citizen who has no 
hope of public office to study very critically all arguments 
favoring the extension of the functions of the government. 

iHe generally, indeed, neither intends to promote the public interest, nor 
knows how much he is promoting it. . . . By directing (his) industry in such a 
manner as its produce may be of greatest value, he intends only his own gain, and 
he is in this, as in many other cases, led by an invisible hand to promote an end 
which was no part of his intention. ... By pursuing his own interest he fre- 
quently promotes that of society more effectually than when he really intends 
to promote it. — "Wealth of Nations," Book IV, chap, ii 



86 PRINCIPLES OF NATIONAL ECONOMY 

The incompetent. There is, however, the question of the 
people who are not competent to pursue intelligently either 
their own interest or the public interest. The feeble-minded, 
the insane, and the immature who have no natural guardians 
must, of course, have their interests looked after and cared for 
by the government. With them it is not a question of the con- 
flict or harmony of their interests with those of the public ; it 
is a question of their competence to pursue even their own in- 
terests intelligently. 

The individual's wisdom is not increased suddenly when he 
is put into public office. Is anyone really competent to pursue 
his own interest intelligently? This question is sometimes 
asked by those who advocate government activity in behalf of 
all classes of people. This is not a very convincing argument, 
for the reason that it goes too far. If no one is competent to 
look after his own interests, how can he possibly be competent 
to look after the interests of the rest of mankind ? The office- 
holder is merely a man or a woman like the rest of us. If we 
are not able to look after ourselves, neither is he or she able to 
look after himself or herself, much less to look after the rest 
of us. 

Because of such considerations as these, the wisdom of man- 
kind has for centuries moved toward the conclusion that gov- 
ernment should confine itself mainly to the control of the field 
where individual interests come in conflict, leaving mature 
people of sound mind to govern themselves wherever and when- 
ever their interests are harmonious. There are occasional re- 
actionary tendencies toward more government interference, but 
these are usually encouraged by those whose expertness lies in 
the direction of vote getting rather than by those whose expert- 
ness consists in the power to do useful and necessary things. 

Force not the only means of control. It has already been 
shown that some degree of control by government over individ- 
ual conduct is necessary, first, by reason of certain conflicts 
of interest among individuals and, second, because of the in- 
competence of certain defective individuals and others of low 



CONTROL OF ECONOMIC ACTIVITIES 



87 



mentality to take care of themselves. Government is the only 
agency that is permitted under civilized conditions to exercise 
forcible control or to exercise force to control individual con- 
duct. There are, however, other ways of influencing conduct 
besides force, and there are other agencies than government 
that may influence individual conduct. Force is necessary to 
prevent some of the cruder forms of misconduct, but it is prob- 
able that other influences must be relied upon to secure right 
conduct of the more refined sorts. Some of these refinements 
of conduct may be quite as important as the cruder forms. It 
is, for example, socially harmful for well men to remain idle 
when others are at work, or for a man even to run the risk of 
catching cold ; but it would be intolerable if the government 
were empowered, except in great emergencies, to conscript idle 
men for work, or to punish a man for needlessly catching cold. 
In ordinary times the conservation of the man power of the 
nation must depend mainly upon moral control. 

Waste of man power. It was suggested in a former chapter 
that the prosperity of a nation depended more upon the econ- 
omizing and utilizing of its fund of human energy than upon 
any other factor and that in consequence the most destructive 
forms of waste were those which wasted or dissipated portions 
of that fund. When a man's energy is going to waste, his life 
is going to waste, and he becomes a drain upon, rather than an 
addition to, the national strength. The following outline indi- 
cates some of the more familiar ways in which men go to waste : 

^, . „ f Involuntarily (the unemployed) 
The idlei ... ^ ., , 1 , • , \ 

I Voluntarily (the leisure class) 



Men who 

GO TO 

Waste 



r Through lack of training 
The ineffectively employed -i Through lack of opportunity 
I Through lack of initiative 
fin vice 
f Wasting their own energyj ^^ dissipation 

' By crime 



The harmfully 
employed 



Wasting the energy of other _ 
people 



By fraud 

By luxury 

By bad investing 

By false teaching 



88 PRINCIPLES OF NATIONAL ECONOMY 

For some of these forms of waste, law and government alone 
can furnish the remedy. Whenever force or compulsion is 
necessary and, at the same time, effective, government can and 
should use the force of positive law, supported by penalties. 
But there are many forms of waste which cannot be remedied 
by force or compulsion, at least not without causing greater 
waste of other kinds. To try to control by law such things as 
laziness, private vices, luxury, false teaching, and many other 
wasteful and harmful tendencies would require an intolerable 
amount of espionage and repression. The waste from this 
source might easily overbalance the waste from the bad habits 
which the law was trying to control. In all such cases we must 
fall back upon morals and religion to induce self-restraint and 
the voluntary adoption of sound habits. 

Can morality be taught ? There are two conflicting theories 
as to the results of moral teaching. One is that such results are 
generally negligible because moral habits are the result of eco- 
nomic and social surroundings; the other is that man's moral 
nature may be so developed by teaching and example as to 
render it proof against bad economic and social conditions, — 
that these conditions are more likely to be the result than the 
cause of the moral habits of the people. The truth seems to be 
found in a combination of these two theories. We are un- 
doubtedly influenced by our surroundings, but we can also by 
sheer force of character not only resist but even overcome and 
change our surroundings. 

Again, weak characters are more largely controlled by their 
surroundings than are strong characters. Two men may go 
under a cold shower bath. One, being in vigorous health, comes 
out feeling refreshed. To him a cold shower is a favorable 
rather than an unfavorable condition. The other, being weak 
to begin with, comes out with a chill. To him it was an un- 
favorable rather than a favorable condition. Yet it was the 
same shower bath, with the same temperature, etc. If one were 
studying jellyfish, one might find that they were the sport of 
such circumstances as the winds, the waves, the tides, and the 



CONTROL OF ECONOMIC ACTIVITIES 89 

ocean currents ; but if one were studying sharks, one might, 
with equal certainty, iind that they were independent of all 
such circumstances. Similarly, if one were studying human 
jellyfish, one might find them and their moral habits to be the 
result of their economic and social surroundings ; but if one 
were studying human sharks, one might reach just the opposite 
conclusion. As a matter of fact, those are the conclusions, in 
general, which students actually reach who study two different 
types of people. When we study considerable numbers of the 
unfortunate people who have not succeeded in life, or who are 
more or less complete failures, we generally attribute their 
failures to bad surroundings or unfortunate circumstances. 
When we study men who have made conspicuous successes, we 
are likely to attribute their successes to their own sterling quali- 
ties. It would be impossible to say whether the circumstances 
under which the former class grew up were better or worse 
than those under which the latter class grew up. In fact, 
many of our greatest men and women came out of the worst 
conditions. 

The unemployed. If we begin with the involuntarily idle (that 
is, the unemployed, as given in the outline on page 87) we shall 
find that many of them are the victims of circumstances which 
they lacked the strength to combat successfully. Frequently 
the hostile circumstances have been such as no one could stand 
against. In these cases no moral problem is involved. They 
are entitled to all the sympathy and aid which society can give 
them. In other cases it was their own weakness or their own 
injurious habits which made them unemployable. There is no 
doubt that better moral and religious teaching would have 
given them a moral brac& and helped them to succeed. At 
any rate, the fact that they are now idle means that they are 
going to waste and are a drain upon, rather than a contribution 
to, the national prosperity, power, and greatness. Anything 
which can be done for future generations to reduce the number 
of such unemployed people will be a definite contribution to 
the strength of the nation. More moral vigor, sounder habits, 



90 PRINCIPLES OF NATIONAL ECONOMY 

and better training are apparently needed for our economic 
prosperity as well as for purely moral or religious reasons. 

The leisure class. When we come to deal with the volun- 
tarily idle (that is, with the leisure class) we are on more cer- 
tain ground. It is in no sense their misfortune, it is their fault, 
that they are idle. The fact that they are voluntarily rather 
than involuntarily idle implies that they could do something 
useful if they chose, but they do not choose to do so. It is not 
opportunity which they need ; it is moral regeneration. 

We must be careful, however, not to confuse the person who 
does not have to earn his living with the person who is idle. 
Many persons of independent means are doing work of the very 
highest utility to the nation and to the world. Scientific investi- 
gation, experimentation, and invention, historical and literary 
study, agricultural and mechanical demonstration, political re- 
form, and philanthropy have all been promoted by men and 
women who could afford to give their time to such things. The 
leisure class, properly so called, includes only those who do 
little or nothing that is useful or productive, but give them- 
selves over to mere self -enjoyment or self-cultivation. Self- 
cultivation as preparation for useful work is itself, of course, 
useful; but without some useful object in view (that is, with- 
out a view to making oneself a contributor to the national 
prosperity and well-being) it is useless. The person who 
spends his time in this kind of self-cultivation is going to waste 
as truly as though he were spending his time in eating, drink- 
ing, and acquiring adipose tissue, gout, or diabetes. 

Whoever belongs to the leisure class as thus defined is a 
drain upon the wealth and prosperity of the nation. The nation 
is better off every time such a person leaves the world. Since 
he does nothing useful, nothing is lost when he ceases to exist. 
When he ceases consuming, his food and clothing at least are 
saved. His wealth, of course, remains behind even after he is 
gone. He came into the world naked, and when he leaves the 
world he takes nothing with him. The more such people there 
are in the nation in proportion to the workers the worse it is 



CONTROL OF ECONOMIC ACTIVITIES 91 

for the nation in the long run. The fewer such people there 
are (that is, the larger the proportion of workers) the better off 
the nation will be in the long run. The whole nation has to be 
supported by the labor of those who work. If all the people 
work, the task is lightened or else the people live better. If 
only a part of them work, either the burden upon the workers 
is heavier or else there is less produced and consequently less 
wealth. 

Do idle consumers make a market for producers ? It is some- 
times argued, however, that a large number of consumers who 
are not themselves producers is necessary to make a market for 
the producers. An appearance of reasonableness is given to 
this argument by taking the case of a single product, say 
potatoes, though any other product would do equally well. It 
is undoubtedly a good thing for the potato growers to have a 
large number of consumers of potatoes who are not themselves 
growers of potatoes, provided the consumers have something to 
give in exchange for potatoes. If the would-be consumers of 
potatoes do not have something to give in exchange, the grow- 
ers will gain nothing from them. The more the consumers have 
which can be given in exchange, the more profitable it is likely 
to be for the potato growers. If the consumers of potatoes are 
living on accumulated wealth, they will have less to give in 
exchange than they would have if, in addition to their accu- 
mulated wealth, they were also producing or earning something. 
The more workers there are in other productive fields besides 
potato growing, the more other things there will be to be given 
in exchange for potatoes. This is a statement which can be 
repeated with respect to each and every industry or occupation, 
which merely brings us back to the general statement that the 
more workers and the fewer idlers there are in any nation, the 
more abundant will goods of all kinds become and the more 
rapidly will the nation advance in prosperity and power. Over- 
production of everything is an impossibility. 

Some are willing to grant, however, that it would be better 
economically if everyone would work than it would be if some 



92 PRINCIPLES OF NATIONAL ECONOMY 

wasted their time in idleness. After admitting this, it will be 
asked, nevertheless. Has not a man a right to remain idle if 
he has accumulated enough to support himself without further 
work ? Assuming that he has earned his accumulation and has 
not secured it by inheriting it, by marrying it, or by a fortunate 
speculation in land, there is something to be said for this con- 
tention. But he who does less well than he can, does ill. One 
who is still capable of doing useful work and chooses not to do 
it is certainly doing less well for his country than he might, even 
though he did well when he accumulated wealth. 

Should men be allowed to accumulate wealth ? But why rely 
upon morals and religion to prevent this form of waste or ill- 
doing? Why not prevent men from living in idleness by for- 
bidding them to accumulate wealth or by taking it away from 
them by law if they do so ? Here is a dilemma which no kind 
of compulsion can remove. If men are not allowed to accu- 
mulate wealth, they will then be encouraged to consume their 
incomes as they go along. Wasteful or luxurious consumption 
is quite as wasteful as idleness. Here, then, is the dilemma. 
If men whose incomes are larger than is necessary to support 
them and their families in that degree of comfort which will 
maintain their efficiency at its maximum are not allowed to 
accumulate, they will consume more than is necessary ; that is, 
they will consume wastefully. If they are allowed to accu- 
mulate a part of their incomes, some of them will be able to 
accumulate so much that either they or their children may live 
without work. It is deemed better and more economical to 
allow them to accumulate and then appeal to them on moral 
and religious grounds not to waste their lives in idleness or use- 
less self-amusement, but to use both their time and their wealth 
productively, than to take away their accumulations and thus 
encourage them to consume wastefully. 

Let us assume, by way of illustration, that two men, A and 
B, have equal incomes, and that their incomes are more than 
sufficient to maintain them and their families in efficient com- 
fort. A consumes his entire income and never accumulates 



CONTROL OF ECONOMIC ACTIVITIES 



93 



anything, while B consumes only a part of his income, investing 
the remainder in productive enterprises of various kinds. The 
overconsumption of A and his family accomplishes nothing. 
What they consume over and above that which is necessary for 
efficient comfort is wasted as far as the rest of the country is 
concerned and might just as well have been burned or thrown 
into the sea, if that would have given them any amusement 
or satisfaction. B's surplus, however, has gone into the expan- 
sion of industries and the increase of the productive power of 
the country. Up to this point B has done much better than A. 
Now let us assume that after a period of years B decides that 
he has worked long enough and that he will spend the rest of 
his life in sheer idleness or self-amusement. A, having accumu- 
lated nothing, cannot retire, but is compelled to go on working 
as long as he is able. From this point on, A is doing better than 
B. During their whole lives it is difficult to say which does 
the better, but the odds are slightly in favor of B. If, however, 
B can be persuaded not to remain idle, but to continue doing 
something useful, even if he does give up his earlier business, 
the advantage is decidedly with B. 

The kind of talent that goes to waste. There is one aspect 
of the problem of the leisure class which makes it especially 
important. That is the quality of the people of whom it is 
made up. If this class were made up of the ignorant, the weak, 
and the incompetent, the loss would not be so great. That 
part of the leisure class which is commonly referred to as the 
tramp, or hobo, class may be thus described. There is a certain 
amount of waste involved here ; but as long as they do not be- 
come a positive nuisance by their lawlessness and vagrancy, 
the waste is not so very great. Even if they were all at work, 
they would not be worth much ; consequently the mere fact 
that they are idle does not of itself occasion much loss. Their 
criminality is, of course, another matter. 

That which is commonly known as the leisure class, however, 
differs from the vagrant class in at least one important partic- 
ular. It is made up in the main of men and women of more 



94 



PRINCIPLES OF NATIONAL ECONOMY 



than average native capacity. The man, for example, who 
has been able to accumulate a fortune out of his own earnings, 
or by his own business foresight and capacity, is pretty certain 
to be a man of considerable productive capacity. If he chooses 
to use that capacity in productive enterprises, . he can add 
materially to the wealth and prosperity of the whole com- 
munity. If he chooses not to use it, the loss to the community 
is correspondingly great. These considerations present a prob- 
lem of the very greatest magnitude. The greater the productive 
capacity of the individual, the more desirable it is, from the 
standpoint of national prosperity, that he shall use that capac- 
ity. On the other hand, the greater his capacity, the more 
likely he is to accumulate a fortune and, consequently, if he 
is not controlled by high moral and religious motives, the more 
likely he is to retire from business and live in idleness. If he 
were a man of low productive capacity, it would not be so great 
a loss if he were to retire ; but such a man will seldom be able to 
accumulate a sufficient fortune to be able to retire. 

Lest there should remain some doubt as to whether it is a 
loss to society when a man of great capacity for usefulness 
stops working, let us consider the case of a great surgeon. 
The author has such a man in mind. He is so skillful and so 
capable that his services are sought by large numbers of people. 
He could have retired years ago and lived in elegant leisure 
on his accumulated wealth. Had he chosen to do so some 
hundreds of people would have been deprived of the benefit of 
his skill. Had he been a man of mediocre ability it would not 
have mattered much ; but a man of mediocre ability could not 
have accumulated enough . to be able to stop working. The 
fact that this brilliant surgeon is so much needed is the very 
thing which would have made it possible, if he had been a man 
of perverted morals, to stop working; but that is the very 
reason why he should not stop. There seems to be no solution 
of the problem, except sound moral standards, which will 
keep such men busy. If they lack such sound moral standards, 
even compulsion would not call forth their best efforts. That 



CONTROL OF ECONOMIC ACTIVITIES 95 

which has been said of our great surgeon may be repeated 
of any great man in any useful occupation. 

The ineffectively employed. By the ineffectively employed 
are meant all those who, through lack of training, lack of 
opportunity, or sheer lack of initiative, are now doing less 
useful work than they might have been doing had they had 
the proper training, opportunity, and initiative. These include 
men who are doing unskilled work who might have been doing 
skilled work, men doing skilled manual work who might have 
been doing expert mental work, or men doing routine mental 
work who might have been doing work requiring inventiveness, 
originality, and enterprise. This is primarily an educational 
rather than a moral problem. The question of morals and reli- 
gion enters into the problem to a certain extent, however. No 
matter how many and excellent the schools and other educa- 
tional opportunities, unless students are inspired with a high 
purpose to make use of the opportunities which are furnished, 
these opportunities alone will not solve the problem. Large 
numbers will remain unskilled, ignorant, and in a low state of 
productivity. The individual who remains less useful to the 
nation than he might be is not only doing himself an injury but 
is also injuring the nation. He who does less well than he can, 
does ill. 

Vice as waste of energy. One very good definition of a vice 
is that it is a habi^ which wastes or dissipates human energy. 
It should, perhaps, be distinguished from crime in that vice 
wastes one's own energy, whereas crime wastes not only one's 
own but that of other people besides. No community which 
wastes in either way a large proportion of its energy can hope to 
prosper as much as a community which does not. The use of 
drugs which merely produce excitation or irritation of the 
nerves, overindulgence in any kind of excitement beyond what 
is necessary for recreation, or even excessive devotion to sport 
may become a vice in this sense as truly as excessive eating 
or drinking. Crime and fraud seem to call for the use of the 
compulsory power of the state rather than for moral suasion. 



96 PRINCIPLES OF NATIONAL ECONOMY 

Luxury. Luxurious consumption can be controlled by au- 
thority and compulsion to a certain extent, but not wholly ; that 
is to say, there are certain clear and undebatable forms of 
luxurious consumption, such as the use of alcohol and opium, 
which the government can safely prohibit, but much must be 
left to the discretion of the individual. There is a time-worn 
argument to the effect that luxurious expenditure gives employ- 
ment to labor and thus benefits the poor. This is similar in 
principle to the theory that the destruction of property, say the 
burning of a building or the breaking of a window, gives em- 
ployment to labor. The stupidity of this argument was never 
more clearly shown than by Frederic Bastiat in his famous 
work entitled ^'Sophisms of PoHtical Economy." He pictures 
a shopkeeper who is about to chastise a scapegrace son who has 
broken a pane of glass. Some sympathetic bystanders argue 
that the boy is really a public benefactor in that he has made 
. work for the glazier, who will then have six francs, the cost of 
a new pane, to spend, and that the butcher, the baker, and 
others will share in the benefit. 

Assuming that it becomes necessary to spend six francs in repairing 
the damage, if you mean to say that the accident brings in six francs 
to the glazier, and to that extent encourages his trade, I grant it 
fairly and frankly, and admit that you reason justly. 

The glazier arrives, does his work, pockets his money, rubs his 
hands, and blesses the scapegrace son. That is what we see. 

But if, by way of deduction, you come to conclude, as is too often 
done, that it is a good thing to break windows, that it makes money 
circulate, and that encouragement to trade in general is the result, 
I am obliged to cry, halt ! Your theory stops at what we see, and 
takes no account of what we don't see. 

We don't see that since our burgess has been obliged to spend 
his six francs on one thing, he can no longer spend them on another. 

We don't see that if he had not this pane to replace, he would 
have replaced, for example, his shoes, which are down at the heels ; 
or have placed a new book on his shelf. In short, he would have 
employed his six francs in a way in which he cannot employ them 



CONTROL OF ECONOMIC ACTIVITIES 97 

now. Let us see then how the account stands with trade in general 
The pane being broken, the glazier's trade is benefited to the extent 
of six francs. That is what we see. 

If the pane had not been broken, the shoemaker's or some other 
trade would have been encouraged to the extent of six francs. That 
is what we don't see. And if we take into account what we don't 
see, which is a negative fact, as well as what we do see, which is 
a positive fact, we shall discover that trade in general, or the aggre- 
gate of national industry, has no interest, one way or the other, 
whether windows are broken or not. 

Let us see, again, how the account stands with Jacques Bonhomme. 
On the last hypothesis, that of the pane being broken, he spends 
six francs, and gets neither more nor less than he had before, namely, 
the use and enjoyment of a pane of glass. On the other hypothesis, 
namely, that the accident had not happened, he would have expended 
six francs on shoes and would have had the enjoyment both of the 
shoes and the pane of glass. 

Now as the good burgess, Jacques Bonhomme, constitutes a frac- 
tion of society at large, we are forced to conclude that society, taken 
in the aggregate, and after all accounts of labor and enjoyment have 
been squared, has lost the value of the pane which has been broken. 

In one respect the argument against luxury is less strong than 
that against the breaking of a pane of glass, but in another re- 
spect it is stronger. When the shopkeeper in the story has to 
spend six francs on a pane of glass, he gets no satisfaction out 
of it and deprives himself of a pair of shoes vi^hich he needs. 
Had he spent the six francs on a luxury, he vi^ould presumably 
have got some enjoyment out of it, even though it had been 
followed by indigestion or a headache. To this extent it would 
have been better to have a luxury costing six francs than to 
have been compelled, through the carelessness of an overexu- 
berant son, to spend that -amount on a pane of glass. On the 
other hand, when one compares the expenditure of money for 
a luxury with the investment of money in tools or Other instru- 
ments of production, one does not get so favorable a picture. 
When one spends money for a luxury, one does, it is true, set 



98 PRINCIPLES OF NATIONAL ECONOMY 

labor to work, in a luxury-producing industry ; but if one were 
to spend the same amount of money for tools, one would set an 
equal quantity of labor to work in a tool-producing industry. 
It is at least as desirable to give work to tool-makers as to 
luxury producers. In fact, it is much more desirable. The more 
men there are working in tool-making industries, the better sup- 
plied with tools the nation will be. The way they are set to 
work is by the purchase of tools ; that is, by the investment of 
money in tools. 

If you have a dollar to spend over and above what is neces- 
sary to maintain you in efficient comfort, you have your choice 
of spending it on some unnecessary article of consumption or 
of investing it in some productive enterprise. Whether it be a 
dollar or a hundred thousand dollars, the principle is the same. 
If you decide to invest your money in a productive enterprise, 
you tend, to the extent of your investment, to set labor to work 
erecting the buildings or manufacturing the machines which 
will be needed in production. The more people there are who 
are investing in this way, and the more they invest, the more 
productive enterprises we shall have. This not only sets labor 
to work preparing the buildings and machinery but will con- 
tinue to employ labor to run the enterprises. Again, as a result 
of this, more goods are produced and the nation is better fed, 
clothed, and supplied with all necessaries. It is, therefore, very 
much better that there should be a great many people investing 
their money productively than that they should merely spend 
their money for extravagant luxuries which are of no use to 
anyone except themselves. He who does less well with his 
money than he might do is doing badly. He therefore does 
badly who spends his money luxuriously when he might invest 
it productively. 

Emulation in extravagance. Nothing could contribute more 
to the general prosperity and well-being of the nation than such 
moral habits as would discourage extravagant consumption and 
encourage thrift and wise investments in all sorts of productive 
enterprises. A particularly vicious and wasteful factor in many 



CONTROL OF ECONOMIC ACTIVITIES 99 

a social group is competition or emulation in extravagance. 
What Professor Thorstein Veblen^ has called '^ conspicuous 
waste" is sometimes required of everyone with social ambitions. 
Of all forms of competition, competitive consumption is the 
most pernicious and wasteful. When men and women try to 
advertise their solvency by ostentatious wastefulness, there 
develops a real competition to see who can advertise most 
effectively. 

This is part of a very widespread tendency. Certain Chinese 
mandarins of an older day used to allow their finger nails to 
grow to inordinate lengths as a visible sign that they did not 
have to work. The binding of the feet of women served much 
the same purpose. Where work is not regarded as respectable, 
some visible sign of respectability is generally sought. Some- 
times these customs are copied even by those who do have to 
work, as in the case of high-heeled shoes and of long trains. 

Emulation in the waste of physical energy. It is not only the 
possession of plenty of money which is thus vulgarly advertised. 
The possession of abounding physical energy is also advertised 
by the practice of conspicuous vices which tend to dissipate 
energy. The young man who can dissipate freely can thus 
advertise to the world that he has recently come into possession 
of health and energy and now has them to spare, just as one of 
the newly rich can- advertise to the world that he has money 
to spare when he spends it extravagantly. When there is no 
sense of moral values and no sober self-restraint, the possession 
of abundant health and the possession of abundant money lead 
to equally demoralizing vices. The poor are safeguarded by 
their poverty from the extravagant use of money, but they are 
quite as likely to indulge in the extravagant uses of vitality as 
are the rich. If there be any difference, the dissipation of 
physical energy is worse than the dissipation of money. 

The teacher, the preacher, or the moral leader who can 
persuade the people to abandon such habits and use their sur- 
plus money and their surplus energy productively rather than 

iThe Theory of the Leisure Class. 



100 PRINCIPLES OF NATIONAL ECONOMY 

wastefully will deserve to stand among the greatest of states- 
men and nation builders. Nations are built by the wise ex- 
penditure of human energy. The less it is wasted, and the more 
it is used up in productive or useful work, the greater the 
progress of the nation. 

We have chosen to discuss, in this chapter, a theme which 
is not ordinarily treated in works on economics. It has gen- 
erally been assumed that economics has nothing to do with 
morals and religion. With certain sentimental and conven- 
tional aspects of these human interests, perhaps, the economist 
has nothing to do. But in so far as they are factors, or may 
become factors, in national wealth, prosperity, and power, 
nothing can be of more interest to the economist. Even re- 
ligion, if it stimulates the productive virtues and discourages 
the vices which waste and dissipate human energy, may become 
one of the greatest factors in the building of a great, prosperous, 
and powerful nation. The nation which possesses such a re- 
ligion will eventually outgrow in all these particulars the nation 
which does not, or which possesses a religion which enervates, 
which lulls to sleep, or which represses the productive virtues.^ 

ipor a fuller discussion of this topic, see the author's book entitled "The 
Religion Worth Having." Houghton Mifflin Company, Boston, 1912. 



CHAPTER VI 
ECONOMIC INSTITUTIONS 
I. Voluntary Agreement 

Compulsion and government. The most important character- 
istic of the economic life of civiHzed people is its freedom from 
compulsion. Nearly every economic act of the average in- 
dividual is one which he does voluntarily. Even when he is 
under compulsion, it is usually found to be for one of a very 
few reasons. It may be to prevent him from using violence or 
fraud against someone else. It may be to compel him to carry 
out an agreement into which he has voluntarily entered. He 
may be compelled to pay taxes, and he is sometimes compelled 
to perform military and other service. The striking fact about 
all these and all other cases of compulsion which are tolerated 
by civilized people is that they are all exercised by the govern- 
ment. Among all free people one private citizen is forbidden 
to exercise compulsion over any other. That is a work which 
is reserved exclusively for the government through its officers. 
'' Compulsion is mine; I will compel," says the government. 

Dangers of compulsion. The power of compulsion is danger- 
ous, and its exercise is generally regarded with disfavor. It 
seems impossible, however, for large numbers of people of all 
kinds, classes, and degrees of intelligence and reasonableness 
to get along together without some umpire to decide disputes 
and enforce his decisions. This means that there must be some- 
where a power of compulsion ; that is, the power to compel men, 
by physical force if necessary, sometimes to do some things 
which they would prefer not to do, and to leave undone things 
which they would prefer to do. This power, however, is very 
carefully safeguarded. It is safeguarded first by being with- 



102 PRINCIPLES OF NATIONAL ECONOMY 

held from everybody except the authorized agents of govern- 
ment. Even they are very carefully hedged about and com- 
pelled to proceed in careful and orderly ways in exercising 
compulsion. We have an elaborate system of rules for the 
settlement of disputes and especially for the collection and 
weighing of evidence in cases of alleged crime. The accused 
person is so carefully safeguarded that it is very difficult to con- 
vict him unless the evidence of his guilt is beyond reasonable 
question. 

The ballot as a necessary check upon the power of compulsion. 
Back of all these rules and regulations of court procedure and 
of government administration we have the system of balloting 
as a check upon those who govern us. With the ballot in our 
hands, even the government itself cannot use more compulsion 
than the majority of us are willing that it should use. The 
ballot is our ultimate safeguard against abuses of that power of 
compulsion which must be exercised by governments. It is a 
most important weapon of defense, but its importance is due to 
the fact that government officers possess the power of com- 
pulsion, and, though it is a necessary power, it is the most 
dangerous power that any human being can possess. It is so 
dangerous that in a free country it is positively forbidden to 
private individuals, and even the government officers, who 
exist partly for the purpose of preventing private individuals 
from exercising compulsion, are permitted to exercise it only 
under the most careful safeguards. 

Contract. One of the greatest discoveries of the human intel- 
lect is that large enterprises can be carried out by voluntary 
agreement among free citizens. Where enterprises can be 
carried out by this method they are found to be carried out 
more effectively and economically than under compulsion. It 
is true, however, that there are some things that cannot be done 
by voluntary agreement. In order that the government, a com- 
pulsory organization, may pay its bills, it cannot rely wholly 
upon voluntary gifts ; it must use compulsion to collect taxes. 
If a great war is to be fought, it is not only necessary to levy 



ECONOMIC INSTITUTIONS 103 

compulsory contributions to pay the expenses of the war, it 
may be necessary to resort to conscription to recruit its armies. 
The army itself in the actual process of fighting has to act 
under a centralized command. Authority and obedience, there- 
fore, rather than voluntary agreement among equals, is the basis 
of all military organizations. It would be quite possible to 
organize industry on the same basis ; that is, to levy compulsory 
contributions to support the industries, to conscript labor to 
man them, and to have everything done by authority and obe- 
dience rather than by contract or voluntary agreement. The 
experience of the world, however, has shown that those coun- 
tries that have tried to run their industries primarily or even 
largely on a basis of authority and obedience have not prospered 
quite so much as those that have given a large measure of free- 
dom from compulsion and have permitted industries to be 
organized on the basis of voluntary contracts and agreements. 
Even people who, in the abstract, disapprove of the system of 
voluntary agreement usually prefer to live in those countries 
where this is the rule and are glad to emigrate from those where 
authority and obedience are the rule. 

Repression of violence. In order that there may be the 
largest possible opportunity for voluntary agreements among 
free citizens, it is absolutely necessary that no private citizen 
shall be allowed to compel any other citizen to do anything 
against his will. If that were permitted, the system of volun- 
tary agreement would suffer a great setback. But if you are 
prevented from exercising any compulsion over your neighbor, 
you will not be able to get him to do anything for you, to pro- 
duce anything which you would like to have, or to give you 
anything in his possession except by his full and free consent. 
You are then reduced to the necessity of persuading him to 
do voluntarily what you otherwise might, if you were strong 
enough, compel him to do. 

Property follows freedom from violence. It cannot be too 
much emphasized that property exists automatically and neces- 
sarily in any group where the individual is safeguarded against 



104 PRINCIPLES OF NATIONAL ECONOMY 

violence. If he is safeguarded against violence, he may hold 
anything in his possession until he sees fit to give it up of his 
own free will. If anyone who tries to dispossess him by violence 
is promptly repressed by the group, that very act on the part of 
the group safeguards him in his possession, — it transforms his 
possession into property. In short, the essence of property ex- 
ists instantly, automatically and necessarily, as soon as violence 
is repressed. Nothing but force or violence either destroys 
private property or seriously limits it. Practically every limita- 
tion that exists or ever can exist in the absolute right of prop- 
erty is due either to the failure of the group to protect the 
individual against some infringement or to the exercise of force 
or authority by the group itself to limit the individual's power 
over his possessions. If we once get this point clearly in mind, 
and never forget it, it will save us from much confusion of 
thought later on. It is the most important fact in the institu- 
tional background of our present economic organization. 

The extent to which violence is repressed is a fairly good test 
of the quality of our civilization. The most important differ- 
ence between civilization and savagery is this: the civilized 
man tries to prosper by making himself so useful that others 
will be glad to reward him for his usefulness, while the savage 
tries to prosper by making himself so dangerous that others will 
be afraid to refuse his demands. When all citizens try to 
prosper by the method of usefulness we have the highest state 
of civilization, but when all try to prosper by the method of 
dangerousness we have the lowest state of savagery, and when 
a part of the citizens try one method and a part try the other 
we have something between. Not many people can live to- 
gether under savagery, because dangerousness destroys rather 
than supports life ; many can live together under civilization, 
because usefulness supports rather than destroys life. 

Property of some kind, belonging to groups or to individuals, 
necessarily belongs to civilization and grows with civilization, 
because civilization is characterized by the absence of violence 
one toward another and the prevalence of voluntary agreement 



ECONOMIC INSTITUTIONS 



105 



among citizens who are free from violence. The mere fact that 
the law forbids you to take by force anything in the possession 
of your neighbor creates in him, as a by-product of your legal 
restraint, the legal right of property in the thing in question. 
In proportion as you are prevented by law from using force 
against him, in that proportion is he protected by law in the 
possession of the thing which you might covet. This repression 
of violence on the part of the government means, in and of it- 
self, that no one can be dispossessed of his possessions against 
his full and free consent. This is, as stated before, the very 
essence of property. 

Repression of fraud. Again, if one citizen were permitted 
to get some desirable service or possession from another citizen 
by deception or fraud, this would not be in harmony with the 
system of voluntary agreement and would give that system 
almost as great a setback as though one were permitted to use 
force. It is understood that an apparent agreement is not 
really a voluntary agreement unless its meaning is understood 
by both parties. If one is deceived and obviously does not 
understand the meaning of the quasi agreement, it is not a real 
agreement. The prevention of fraud is, therefore, essential to 
the preservation of the system of voluntary agreement. The 
suppression of violence and the prevention of fraud together 
produce the institutions of property and contract as by-products 
of the system of voluntary agreement among free citizens. 

Enforcement of contracts. There would be another serious 
setback to the development of the system of voluntary agree- 
ment if agreements were not carried out or promises kept. If 
you should make a voluntary agreement with a fellow citizen 
and should yourself receive some benefit from it, and then 
should refuse to carry out your part of the agreement by which 
he would receive his expected benefit, he would be very cautious 
about entering into another agreement with you. If men in 
general were free to withdraw from an agreement in this way, 
they would all be cautious about making agreements. In short, 
the system of voluntary agreement could not develop very far 



I06 PRINCIPLES OF NATIONAL ECONOMY 

unless there were some means of compelling men to fulfill their 
parts of the agreements which they voluntarily made. The 
enforcement of contracts is, therefore, a necessary part of the 
system. 

II. Property 

Property a by-product of freedom. It is obvious that the only 
way in which free men can work together is on the basis of 
voluntary agreement. The system of voluntary agreement is, 
therefore, a necessary product of freedom. It was suggested 
above that the institution of property was in turn a by-product 
of the system of voluntary agreement. There could not be an 
absence of compulsion without property, and the existence of 
the power of compulsion is the only limitation there is on prop- 
erty. If private individuals are permitted to use compulsion 
against others with no check or hindrance on the part of gov- 
ernment, there is no such thing as property. Where they are 
forbidden to exercise any compulsion one against the other, 
there is property. Where this is true the only limitation left 
upon the right of property is the compulsory power of the gov- 
ernment; that is, the government may take property without 
the consent of the individual possessor. The more the govern- 
ment chooses to exercise this power, the more it limits the 
property rights of individuals. 

The historical development of the system of voluntary agree- 
ment has been a slow process and has been accompanied by 
the equally slow development of the institution of property. 
There have been a good many attempts to trace the historical 
development of the institution of property independently of 
the underlying conditions that make property possible or con- 
ceivable. Needless to say, such attempts are of no great 
scientific value. 

Ways of acquiring property. The individual who has found, 
picked up, or made a thing which he needs, or to which he has 
taken a fancy, becomes the recognized owner of it when organ- 
ized society undertakes to protect him against violence and 



ECONOMIC INSTITUTIONS 107 

fraud. If this is done, no one else can dispossess him of it with- 
out his consent. Where this is the case, a person can only 
come into possession of a thing by finding it, making it him- 
self, or getting it from someone else with that person's consent. 
That consent may be obtained in many ways, but a very com- 
mon way is to buy the object of its possessor by offering him 
in exchange for it something that he would rather have. Under 
this system it has generally been held that the finder of a thing 
can no more be dispossessed by violence than the maker of a 
thing. In other words, if you have discovered, found, or picked 
up some object not hitherto possessed by anybody else, you 
cannot be dispossessed of it without your consent, which means 
literally that you own it. If somebody else wants it, he can get 
it from you only with your consent ; and that may mean, and 
usually does mean, that he must give you something in ex- 
change for it. 

Development of the idea of property. The historical develop- 
ment of the custom of recognizing property in this sense has 
been variously described. In a very illuminating article, en-" 
titled "Rudimentary Society among Boys,"^ Mr. John Johnson 
has described the life of the boys on McDonogh Farm in Mary- 
land. This farm, the model for many subsequent experiments 
in pedagogics, was a combined home and school for boys in 
which, out of school and work hours, they were allowed to roam 
at will and do very much as they pleased. The author of the 
account, who had himself been one of the boys, traces an inter- 
esting parallel between the development of laws and customs 
among those boys and among our primitive ancestors. 

A Boy Society. Over these teeming eight hundred acres the 
" McDonogh boys " roam at will, each according to his ability striving 
to become a mighty hunter in the earth. During the first spring 
after the opening of the school the boys found the woods abounding 
with birds' eggs and squirrels, which they might have for the trouble 
of taking. During the autumn they gathered chestnuts and walnuts 

1 Johns Hopkins University Studies in Historical and Political Science, 
Second Series, No. XI. Baltimore, 1884. 



io8 PRINCIPLES OF NATIONAL ECONOMY 

and stored them away to be cracked and eaten before the big fire in 
the schoolroom. Whether in spring or in autumn, all who went to 
the labor of searching were rewarded with an abundance. When the 
frost had killed the green shoots and troubled the rabbits to get a 
living, every boy that chose to do so set traps in the swamps and 
ditches and baited them with sweet-smelling apples or more pungent 
and effective onions. 

The ground was then regarded as the property of the community, 
and while, like the ancient Teutonic villager, each "McDonogh boy" 
took pains to exclude strangers from the Mark, each regarded himself 
with the rest as a joint owner of the harvest of nuts, and all had 
equal rights of hunting and trapping in the waste. As in the 
precursors of those Aryan villages of the East, recently studied by 
Phear, ''land was not conceived of as property in the modern sense, 
or as belonging to any individual." The whole was common to them 
all, and every boy had a right to a portion of the fruits of the ground. 



The rabbit-trapping season begins about the middle of October 
and ends early in December, Its opening depends upon the 
weather and not, like the walnut harvest, upon the legislation of 
the boys. If there is an early autumn the rabbits may be induced 
by the scarcity of food to enter the traps sooner than if the warm 
weather continues till late. 

In the first autumn after the opening of the school each boy that 
chose to do so made a box of planks, fitted one end with a door that 
would fall at the touch of a trigger, and, having found a promising 
spot, there set his trap. The hungry rabbits were tempted with 
fragrant apples and appetizing onions, and a few victims were enticed 
within the fatal door. At that time no boy set more than half a 
dozen traps, and almost the whole school enjoyed the delightful 
anticipation of having rabbit for breakfast on some future morning. 

But the spots where rabbits can be caught on eight hundred acres 
are comparatively few, and hence the closeness of the traps inter- 
fered with the amount of the catch. It is a habit with rabbits to 
move about in well-marked paths, and the boys usually set their 
traps in these places. Generally a rabbit will enter the first trap in 
his path, and boys often complained that their traps were rendered 



ECONOMIC INSTITUTIONS 



109 



useless by the proximity of others. After a year or two of this 
unsatisfactory state of affairs a large boy, who had set his traps 
rather earlier than the rest, began dropping heavy stones upon all 
traps set closer to his own than he thought desirable. In such a 
society as we are studying, a hard-fisted fellow of fifteen is a great 
personage and has much the same influence as a great warrior in 
a primitive village. The example of this boy-magnate was imitated 
by all who dared ; and by common consent, or perhaps by common 
submission, a limited distance between traps was agreed on. Within 
a circle about forty yards in diameter, drawn about a trap already 
set as a .center, no other trap was to be placed. For the season 
the owner of the trap first placed on any given piece of ground 
either assumed or was intrusted with authority to break any trap 
placed within the specified distance of his own. 

Scarcity of land. It will be noted that the scarcity of land 
suitable for trapping rabbits created an antagonism of interests 
among the members of that community. It was this which led 
to the effort on the part of certain fortunate individuals to pro- 
tect their own interests by excluding others from their "land." 
The principles involved here are similar to those in a mining 
region where there are only a few desirable locations and many 
miners. In most mining camps, however, priority of possession 
was the basis of ownership. The staking out of a claim accord- 
ing to regular rules was accepted as the evidence of priority of 
possession. 

Much the same principle was involved in the disputes over 
cattle ranges in the West. When there was pasture enough for 
everybody there was no trouble and no desire for ownership or 
control of range land ; but when pasturage began to grow 
scarce it became necessary to bring the ranges under some kind 
of f ontrol, otherwise they would become overstocked and every- 
body would lose. To men with practical minds rather than 
vague ideals it has always seemed better that a few should gain 
some advantage from the soil of a given locality than that all 
should fail through the exhaustion of its resources. Accordingly 



no PRINCIPLES OF NATIONAL ECONOMY 

the exclusive use of certain ranges is given over to certain 
cattlemen, and others must move on to new ranges. 

The Case of Abram and Lot. Abram showed such a practical 
mind as this in his famous compromise with Lot on the sub- 
ject of pasturage : 

And Abram was very rich in cattle, in silver, and in gold. 

And he went on his journeys from the south even to Bethel, unto 
the place where his tent had been at the beginning, between Bethel 
and Hai ; . . . 

And Lot also, which went with Abram, had flocks, and herds, 
and tents. 

And the land was not able to bear them, that they might dwell 
together: for their substance was great, so that they could not 
dwell together. 

And there was a strife between the herdmen of Abram's cattle and 
the herdmen of Lot's cattle: and the Canaanite and the Perizzite 
dwelt then in the land. 

And Abram said unto Lot, "Let there be no strife, I pray thee, 
between thee and me, and between my herdmen and thy herdmen; 
for we be brethren. 

Is not the whole land before thee ? Separate thyself, I pray thee, 
from me : if thou v/ilt take the left hand, then I will go to the 
right ; or if thou depart to the right hand, then I will go to the left." 

And Lot lifted up his eyes, and beheld all the plain of Jordan, that 
it was well watered every where, before the Lord destroyed Sodom 
and Gomorrah, even as the garden of the Lord, like the land of 
Egypt, as thou comest unto Zoar. 

Then Lot chose him all the plain of Jordan ; and Lot journeyed 
east ; and they separated themselves the one from the other. 

Abram dwelt in the land of Canaan, and Lot dwelt in the cities 
of the plain, and pitched his tent toward Sodom. 

It is always possible to "trek." There was one important 
difference between the situation of the herdsmen in a cattle 
country, or the miners in a mining camp, and that of the boys 
on the McDonogh farm. When the good locations in the range 
country and the mining camp are all occupied, other would-be 



ECONOMIC INSTITUTIONS HI 

ranchers or miners need not come to these spots, or, if they 
happen to be there, they can move on to other opportunities in 
other places. The boys could not leave the school, and when 
all the good locations for rabbit traps were occupied the other 
boys had to go without rabbit or else pay rent to the fortunate 
possessors of the rabbit land. It was no great hardship for 
Abram and Lot to separate, each going where there was pas- 
turage, though each might, if he had been narrowly stubborn, 
have refused to budge an inch. On the whole, it is better that 
people should separate and observe boundary lines than that 
they should all strive tenaciously for the best locations and all 
suffer alike through the overcrowding. 

Boundaries. This observance of boundary lines is the first 
element in the institution of property in land. Some rule of 
this kind is an absolute physical necessity. In some cases the 
boundary is tribal or national, in other cases it is the boundary 
of the lands of the village, the town, or the clan, and in still 
others it is the boundary of the lands of the family as we now 
know it. In all cases, whether the lands of the tribe or village 
be held in common or in severalty, they must be protected 
against outsiders ; otherwise the tribe or the village is in danger 
of starvation. The modern conception of property in land is 
property in severalty, which is commonly called individual 
property. Since, however, the head of a family cannot, gen- 
erally, sell the land without the consent of other members of 
his family or their guardians, it seems that property in land 
is more of a family than of an individual affair. 

Priority of possession. The practical situation out of which 
the institution of property in land grows may be described as 
priority of occupancy. Whether it be the nation, the tribe, or 
the individual which owns the land, it usually bases its claim 
against all comers upon priority of occupancy. Conquest is 
sometimes resorted to to destroy this claim. The world has 
never regarded this as just, but it has not always been able to 
prevent it. Having once conquered a territory, however, the 



112 PRINCIPLES OF NATIONAL ECONOMY 

conquering tribe or nation can use its claim of priority against 
rival claimants in the future. Thus, we, in the United States, 
should certainly feel that we had a grievance if some upstart 
nation were to try to dispossess us as we long ago dispossessed 
the Indians. 

However, we do not now own the land as a nation (except 
the public domain) but as families. The government recog- 
nizes the right of priority in awarding land to individuals. 
Under the system of voluntary agreement we have the right of 
free contract, of bargain and sale. Under this system the right 
based upon priority of possession may be transferred from one 
family to another a great many times. The subsequent owners 
base their claim upon the right of purchase, but it goes back to 
the fact of priority on the part of the first owner. If one will 
undertake to trace the title to a piece of land, he will discover 
how important a factor priority is. 

The unattached versus the attached. In these matters we face 
the same practical necessity as the lower animals. Even cer- 
tain shellfish, like the oysters, may serve as an illustration. The 
young of these shellfish pass through a free-swimming stage 
before, they become attached to the bottom of the ocean. When 
one has become attached, his priority must, of physical neces- 
sity, be respected by young free-swimmers who are looking for 
a place to attach themselves. Presumably they have the power 
of swimming in order that they may "move on" and find new 
places to which to attach themselves. They may, in a sense, be 
said to pass through a stage similar to the pilgrim stage of our 
Eastern settlements and the prairie-schooner stage of our West- 
ern settlements. In all these cases it is the most vigorous, self- 
reliant, and courageous individuals who do the pioneering in 
new areas. 

Tribal or national property differs in one important respect 
from individual or family property. In the former case the 
tribe or nation must defend its own property, there being no 
higher power to which it can appeal for protection against an 



ECONOMIC INSTITUTIONS 



113 



outside invader. In the latter case the individual or the family- 
does not have to defend its own possession, but may call upon 
the state for defense. So important has this become that we 
are in the habit of speaking of property almost as though it con- 
sisted exclusively in this protection afforded by the state. Thus 
the individual may possess an object, but he is not said to have 
property in it unless the state recognizes his right to possess it 
and warns others not to meddle with it, undertaking to punish 
anyone who does. Moreover, the individual's property rights 
in a thing extend only so far as the state recognizes and warns 
others not to meddle. In some cases, for example, an owner of 
land is not permitted to exclude other persons from walking 
across it, in which cases those other persons are said to have 
right of way. There are numerous other limitations upon the 
property rights. 

Human rights and property rights. Certain confused minds 
have attempted to make a distinction between human rights 
and property rights. The fact is, however, that all prop- 
erty rights are human rights. Strictly speaking, property has 
no rights and could not possibly have any. Human beings 
have rights in property. Property owners have rights in the 
things which they, own. 

While the original fact on which property in land and other 
natural objects is justified by the state is priority of possession, 
the basis of property in the products of industry is that of 
production, or, if it is not too strong a word, of creation. The 
boy who first finds and takes possession of a natural object 
of desire and the boy who makes or contrives another object of 
desire both feel pretty strongly that the objects belong to them. 
Both, however, recognize the right to transfer. Men feel very 
much the same way. The fact that one has made a thing is 
generally recognized as giving him a right to it. It is also recog- 
nized that he may transfer that right undiminished to another 
person, in which case the other person acquires all the rights 
possessed by the maker. 



114 PRINCIPLES OF NATIONAL ECONOMY 

Kinds of property. Property may be classified, on the basis 
of the original method of acquiring it, into the three following 
groups : 

C Things which one has produced 
'Earnings J Things received in exchange for what one has pro- 
[_ duced 

' Natural objects found and appropriated 
Things whose value has greatly increased while in 

one's possession 
Things received by gift or inheritance 
Things acquired by the destructive and deceptive 
. Stealings <{ methods named in the outline in Chapter IV, 
page 60 



Property. 



Findings 



The question of the moral right or the social expediency of 
private property, even in things which one has produced, has 
been discussed from very ancient times. In Plato's "Republic" 
it is argued that questions of mine and thine tend to divide 
rather than to unite the state. From that day down to the 
present there probably has never been a generation in which at 
least a small minority has not opposed private ownership. 

Public or common property as compared with private or 
family property. So far as the pure morals of the argument 
are concerned there is as much to be said against public as 
against private ownership, unless the public is defined so as to 
include all mankind rather than a single tribe or nation. If it is 
held to be wrong for an individual to call anything his own to 
the exclusion of his brother men, on the ground that such 
conduct on his part would place a barrier between himself 
and his brethren and thus be contrary to the principles of the 
brotherhood of man, it is equally wrong, and for the same 
reason, for any tribe or nation to call anything its own to the 
exclusion of other tribes or nations. That is quite as much 
opposed to the principle of universal brotherhood as is private 
ownership. 



ECONOMIC INSTITUTIONS 



III. The Family 



"5 



The recognition of property, which follows automatically 
wherever the possessor of a thing is protected against dis- 
possession through violence or fraud, tends to give the individ- 
ual a chance to safeguard the interests of those for whom he 
cares most. If he had little or no family feeling, but strong 
tribal feeling instead, he would care more for the safeguarding 
of the tribe than for the safeguarding of his own family. In 
that case, tribal or communal property would be the logical 
thing. Each one would then have an opportunity to work in the 
interest of those for whom he cared most; that is, all his 
fellow tribesmen. In voluntarily disposing of his possessions 
he would naturally turn them over to the whole tribe. But 
when one cares more for one's flesh and blood than for other 
members of the tribe or nation, one is likely to work in the 
interest of the former. Private or family property is here the 
logical thing, because it gives to prudent persons the power to 
safeguard the interests of those in whom they have a powerful 
interest. Such persons have the strongest possible motives for 
accumulating property, and it is very much to the interest of 
the nation that everyone should accumulate property. That is 
one way by which the prosperity of the nation is promoted. 

Some form of property inevitable. Whether we approve of 
private property or not, on grounds either of sentimental 
morality or of social expediency, we must make up our minds 
that it will continue to exist. The instinct of possession is so 
strong that no government could withstand it. One class 
may array itself against another, the propertyless class may 
outvote the propertied class, honestly supposing that it is 
doing so on grounds of broad humanitarianism ; but experience 
has shown that the new class, when it comes into power, shows 
the same instincts and tendencies as were shown by the class 
which was in power before it. On these instincts and tenden- 
cies, rather than on philosophical theories, are governments 
and institutions built. Moreover, they must be built on such 



Il6 PRINCIPLES OF NATIONAL ECONOMY 

foundations in order to be durable. Theories are easily changed 
and do, as a matter of fact, change frequently. Institutions 
built on theories must, therefore, be unstable. But instincts 
are hard to change and, as a matter of fact, change very slowly. 
Institutions based on these instincts may, therefore, be durable. 

Property rights always limited. It must be observed, how- 
ever, that such a thing as an absolute and unqualified right of 
property has never existed and does not now exist. No govern- 
ment undertakes to protect any individual in the unqualified 
use or abuse of anything which he calls his own. It may not 
permit another individual to dispossess him, or seriously to in- 
terfere with his use, but it will itself exercise that power when- 
ever it deems it expedient to do so. The whole question of 
property is like every other question — it is subordinate to the 
pubhc good. In so far as the private use or control of anything 
is thought to be advantageous to the general public in the long 
run, so far will a wise government protect the individual against 
outside interference with that use. This is as far as private 
property extends. Whenever or wherever the private individ- 
ual's use or control of a thing is thought to be contrary to the 
public interest, there the wise government's protection will end. 
It is generally thought by the best students to be to the public 
interest that individuals shall be free to use their physical 
possessions, as they use their personal qualities, for productive 
rather than for destructive purposes. No wise government per- 
mits a person to use even his own muscular or mental strength 
without limit or qualification ; but there appear to be as good 
reasons why he should be free to use and control his physical 
possessions as to use and control his personal powers, so long 
as he uses them productively. It appears, for example, as ex- 
pedient that the farmer should be permitted to use his tools 
and implements for productive purposes as that he should be 
free to use his muscles or his brain. 

Personal powers and physical possessions. There are, to be 
sure, important differences between one's personal powers and 



ECONOMIC INSTITUTIONS I17 

one's material possessions; but these differences, however im- 
portant they may be from other points of view, seem to have no 
importance from the point of view of productivity and useful- 
ness on the one hand or of destructiveness on the other. 

It was indicated above that what is sometimes called private 
property appears in certain cases to be family property rather 
than individual property. In fact, there is a much closer con- 
nection between that institution called the family and that 
institution called property than is ordinarily understood or 
appreciated. If we assume that the average individual has a 
deeper interest in his own flesh and blood than he has in other 
people, and if we admit that, on the whole, it is desirable that 
he should have this deeper interest, it is not illogical to permit 
him to make provisions for their special care and maintenance ; 
otherwise we should compel him to work equally in the inter- 
ests of all members of the community, even though he does not 
care equally for all of them. Again, if in his efforts to provide 
for them he conceives it to be wise to spend a part of his income 
for durable goods rather than for goods for immediate con- 
sumption, it will be difficult to state a satisfactory reason why 
he should not be permitted to do so. If we permit him to pur- 
chase these durable goods, and if we insist that he shall not be 
dispossessed without his consent, — in other words, if we con- 
tinue to protect him in the possession of these durable goods, — 
we have the institution of property. If he did not care any 
more for his own flesh and blood than for all the other members 
of the community, there is no likelihood that he would care to 
own anything which might just as well be devoted to the use 
of all those for whom he cares. He would work just as hard 
in the interest of all members of the community or to accumu- 
late material goods for their benefit as he will now work for 
the smaller family group or to accumulate goods for their 
satisfaction. 



Il8 PRINCIPLES OF NATIONAL ECONOMY 

IV. Inheritance - 

But the care for one's own flesh and blood extends beyond 
the period of one's own life. One of the strongest motives for 
industry and thrift is the desire to provide for the needs or de- 
sires of one's offspring after one has ceased to live. This gives 
rise to the system of inheritances or of inherited property. 
When the state recognizes the desire to provide for one's off- 
spring as a legitimate motive and undertakes to protect the in- 
heritors of property in the same way that it protects anyone else 
who has come into the possession of a thing legitimately (that 
is, without force or fraud), then there will be inherited wealth, 
and the inheritor inherits all the rights of property which had 
belonged to the accumulator. 

Inheritance and voluntary agreement. This is in harmony 
with the principle of voluntary agreement. Any piece of prop- 
erty which you can get from anybody else with his full and free 
consent and that of all the others who have any claim upon it, 
is yours as truly when you inherit it as when you buy it. Buy- 
ing it is only one way of acquiring it with the full and free con- 
sent of the previous possessor ; inheriting is another. 

Inheritance and inequality. Under this system of inheritance, 
however, a situation will soon arise wherein a considerable num- 
ber of persons will find themselves in the possession of property 
which they themselves never produced, earned, or purchased 
out of their earnings, whereas there will be others who can 
never come into possession of any property except by produc- 
ing it, earning it, or purchasing it out of their earnings. This 
will doubtless begin to look unfair, and the unfortunate in- 
dividuals who inherit nothing from their ancestors may begin 
to envy those more fortunate persons whose ancestors provided 
for them. A real conflict of interests is likely to grow out of 
this situation, giving rise to a serious problem in social justice. 

Two methods of approach} There are two points of view from 
which to approach the problem of inherited wealth. These methods 

1 From the author's " Essays in Social Justice." Harvard University Press, 191 5. 



ECONOMIC INSTITUTIONS 



119 



of approach lead to such contradictory conclusions that it seems 
necessary to follow each in turn to its logical result and then see 
what can be done toward harmonizing them. 

The point of view of the present generation. From the point of 
view of the present generation, or the generation which has accu- 
mulated the wealth in question, the following considerations will ap- 
peal to most men as reasonable. Assuming, to begin with, that a 
man has earned his income, there is no good reason why he should 
be compelled to consume it all and save none of it. In fact, it can 
easily be shown that it is very much better for society that he should 
save a part of it, — all of it, in fact, beyond what it is necessary that 
he should consume in order to maintain his working efficiency at its 
maximum. If he saves a part of his income, it is better that he 
should invest it in productive or useful tools rather than that he 
should hide it away. If he saves a part of his income and invests it 
v/isely in useful or productive tools, there is no harm in allowing him 
some control over them ; in other words, there is no harm in regard- 
ing them as his property. If they are his property, there is no harm 
in allowing him some freedom in disposing of them. If he chooses to 
give them away, it would seem inexpedient and unjust to forbid him 
to do so. And if he is to be permitted thus to dispose of them, there 
could be no harm in permitting him to give them to his children or 
near relatives rather than to strangers. 

Some fortunes are earned. All this is, of course, based on the 
assumption with which we started ; namely, that he has actually 
earned his income. If he has not earned it, the obvious thing to do 
is to correct the evil at the source by cutting off his unearned income. 
It would be exceedingly unintelligent to permit him to receive an 
unearned income, and thus build up a swollen fortune, and then try 
to correct the evil after he is dead by depriving his heirs of their in- 
heritance. This unintelligence would amount to a crime if fortunes 
actually earned were swept away by the abolition of inheritances 
merely because some other fortunes were unearned. This would be 
worse than punishing the just with the unjust for sins which the 
unjust had committed ; it would be punishing the heirs of the just 
and of the unjust for sins which the unjust had committed. 

Looking at the question of inheritance apart from the question of 
the source of income, and looking at it also from the point of view 
of the generation which accumulates the wealth, there seems no good 



120 PRINCIPLES OF NATIONAL ECONOMY 

reason why the individual who saves a part of his income and accu- 
mulates a fund of wealth should not be permitted to transmit it to 
his widow and orphans. How wide the circle of relatives should be 
who should be allowed a legal claim on the inheritance is another 
question. Undoubtedly it should be much narrower than is at pres- 
ent permitted. Since one of the strongest motives to accumulation is 
the desire to provide for the members of one's own family, and since 
accumulation is socially desirable, there is a positive reason why the 
right of transmission by inheritance should be sustained. One effect 
of the destruction of this right would be to encourage lavish con- 
sumption and discourage accumulation. Each man who loves to 
gratify himself would be tempted, somewhat more strongly than he 
is at present, to say, as soon as he had accumulated a competence, 
" Soul, thou hast much goods laid up for many years ; take thine 
ease, eat, drink, and be merry." If he could not leave anything to 
his family, they would be just as well off if he were to consume his 
fortune as if he were to save it. Under such conditions, unless the 
law were evaded by gifts during the lifetime of the accumulator, 
capital, which is tools, would tend to grow scarce or increase less 
rapidly, industries to contract or to expand less rapidly, the effective 
demand for labor to decline and wages to fall, while interest would 
rise in response to the scarcity of capital. 

The point of view of succeeding generations. Thus far we have 
considered the problem exclusively from the standpoint of the genera- 
tion which accumulates wealth, forgetting succeeding generations. If, 
now, we consider the matter exclusively from the standpoint of suc- 
ceeding generations, forgetting the generation which accumulated the 
wealth in question, the whole situation has a different look. From this 
new point of view we shall notice, first, that certain individuals — the 
inheritors of wealth — start in the race of life with a sum of capital 
in addition to their natural powers, while others start with nothing 
but their natural powers. It is obvious that the inheritors have an 
advantage in the race, and therefore it is also obvious that it is not 
a fair race. 

What is fair competition ? It is perhaps desirable at this point to 
consider the meaning of the word "fair" as applied to any form of 
competition. In a foot race, for example, the competition is some- 
times said to be fair when all the runners are given an even start 
and given an equally good track on which to run. Of course Ihere 



ECONOMIC INSTITUTIONS I2I 

will be great differences in the speed of the different runners, and it is 
certain that there will be great unevenness among the runners at 
the end of the race, even though they were all even at the start and all 
had equally good outward conditions. Inequality of results, when 
it can be attributed exclusively to inequality of power and not to an 
uneven start or any outward advantages or disadvantages, may, from 
this point of view, be considered fair. 

Equal results. In other cases there is a deliberate attempt to pre- 
dict the relative speed of the various runners and to arrange a series 
of handicaps in order that the race may be as nearly even at the end 
as possible. In this case they are deliberately given an uneven start 
in order that there may be an even finish, or a finish as nearly even 
as the handicap committee can arrange. If the handicaps are in- 
telligently and fairly calculated, this kind of race also is said to 
be fair. 

An even start. The same principles would apply to economic com- 
petition. If all the competitors were given an even start and if all 
were given a fair field with no favors, it would be called, from one 
point of view, fair competition. On the other hand, if it were possible 
to arrange a series of handicaps, giving each of the weaker com- 
petitors an advantage commensurate with his weakness, such a com- 
petition might also be said to be fair. The competitors would be 
given an uneven start and uneven advantage in order that they might 
be as nearly even as possible at the end of the race. 

Handicaps. But it must be remembered that a system of handi- 
caps must be intelligently arranged, otherwise it becomes outra- 
geously unfair. If instead of giving some outward advantage to the 
slower runner it were given to the swifter runner, and the prizes 
awarded on the basis of the results of such a race, every sentiment of 
fairness would be outraged. And in the field of economic competi- 
tion, if the handicaps were arranged in inverse order to the power of 
the competitors, everyone would say that it was unfair. Again, if the 
handicaps were arranged in a haphazard fashion, without any regard 
to the power of the competitors, so that the stronger were as likely 
as the weaker to be given an outward advantage, the case would be 
only a little better. No one would even pretend that it was a fair 
competition. This is exactly what happens to economic competition 
under the system of inherited wealth. From this point of view, for- 
getting the other, there can scarcely be two opinions on the subject. 



12 2 PRINCIPLES OF NATIONAL ECONOMY 

Inheritances ought not to be allowed, because they make competition 
unfair. The strong competitor is quite as likely as the weak to be 
given the advantage of a fund of capital with which to start the 
race of life. 

Compromising the two points of view. These two points of view, 
from which such opposite conclusions are reached, may be harmo- 
nized, or compromised, by considering the family rather than the 
individual as the unit of society, and considering the family as a 
permanent unit unaffected by the brevity of individual lives. We 
should then assume that economic competition takes place between 
families rather than between individuals. And the family being a 
permanent rather than a transitory unit, the race or the competi- 
tion cannot be considered as having a beginning or an end. What is 
called the inheritance of wealth is, therefore, not to be considered as 
giving an individual an unearned advantage in competition so much 
as keeping in the possession of the family the advantage which it 
has already earned. 

In proportion as one is in the habit of thinking in terms of the 
family rather than of the individual and of emphasizing the solidarity 
and perpetuity of the family and the unity of its interests, in that 
proportion will one emphasize the first point of view and minimize 
the arguments which are used against the inheritance of wealth. But 
in proportion as one is in the habit of thinking in terms of the individ- 
ual rather than the family, or of thinking of the family as a temporary 
biological unit (beginning with marriage and ending with death) 
existing for the purpose of producing children and bringing them to 
maturity, in that proportion will one naturally emphasize the second 
point of view and minimize the arguments in support of the in- 
heritance of wealth. Before considering the merits of the two con- 
ceptions of the family it is safe to record the fact that the undoubted 
tendency of popular opinion is away from the conception of the 
family as a solid and perpetual social unit and toward that of the 
family as a temporary, biological unit. There are even evidences of 
a tendency toward the purely individualistic conception which elimi- 
nates the family as an institution, though recognizing the necessity 
of a mating of males and females for the propagation of the species. 



CHAPTER VII 
THE QUALITY OF THE PEOPLE 

What kind of people are we ? However wisely the economic 
activities of the people may be controlled by government, 
morals, and religion, and however sound and rational their 
economic institutions may be, much will depend upon the quality 
of the people themselves. In fact, all these agencies in a demo- 
cratic country will themselves be determined by the quality of 
the people. A wise and benevolent despot might conceivably 
give degraded people a much better government than they 
would ever originate, and he might even encourage a sounder 
system of morals than they would ever practice if left to them- 
selves; but democratic people have no one to depend upon 
but themselves, and if they are of poor quality, there is no 
hope for them, because their system of control and their eco- 
nomic institutions are likely to be of poor quality. 

How much civilization can we stand ? There is a story of an 
aged savage who had lived since his early youth under civilized 
conditions, but who in his old age returned to his native tribe, 
saying that he had tried civilization for forty years and it was 
not worth the trouble. Much of the philosophy of civiliza- 
tion is contained, or at least implied, in his remark. Civiliza- 
tion consists largely in taking trouble. Civilized people are 
a great deal of trouble to themselves; and civilization will 
never seem worth the trouble to anyone whose mind is so con- 
stituted as to be incapable of taking trouble without great 
fatigue and irksomeness. It is more trouble to plan for the 
future than to live on the impulse of the moment ; it is more 
trouble to save seed corn than not to save it ; it is more trouble 
to invest one's income in productive enterprise than to consume 
it all as one goes along, — in short, it is more trouble to think, 
to plan, to exercise self-control, to direct one's conduct with a 

123 



124 PRINCIPLES OF NATIONAL ECONOMY 

view to one's needs ten or twenty years hence than to live 
wholly in the present, allowing the future to take care of itself. 
Of course it works better in the long run to take trouble of this 
kind. People who are willing to take this kind of trouble 
become civilized ; people who do not, remain savages. 

To one kind of person, with low mentality and little moral 
self-control, the alternatives present themselves of taking trou- 
ble every day with a view to his interests in the distant future 
and of refraining from taking trouble and facing hardship in 
the distant future. Which alternative he will choose will depend 
on the kind of man he is. If the hardships of the future seem 
less burdensome than the fatigue of taking trouble in the 
present, he will not take the trouble but will accept the hard- 
ships of the future. Such a man will never become civilized, 
or if he ever does become civilized he will ultimately decide, as 
did our aged savage, that it is not worth the trouble, and he 
will, therefore, relapse into savagery. On the other hand, an 
individual of higher mentality and moral self-control, when 
facing the same alternatives, will choose the other one. Taking 
trouble is not so very burdensome to such a person. Thinking, 
planning, subordinating the whim of the moment to the larger 
interest of the future, are easy to such a man. He will naturally, 
therefore, choose that alternative and will, almost automati- 
cally, become civilized. In the long run, therefore, the fate 
of our civilization will be determined by the kind of people 
we are, which will determine the kind of choices we make when 
facing alternatives of the* kind mentioned. 

Why man rules over the rest of the animal creation. In at- 
tempting to discuss the quality of the people we are not nec- 
essarily entering upon a discussion of the whole field of 
physiology, psychology, and morals. There are certain out- 
standing qualities which man possesses in greater degree than 
the brutes, which civilized man possesses in greater degree than 
the savage, and which, in any civilized community, the more 
successful classes possess in greater degree than the less suc- 
cessful. There are other qualities, such as the sense of smell and 



THE QUALITY OF THE PEOPLE 125 

the ability to endure pain, which certain savages seem to possess 
in greater degree than civilized man. If these were the impor- 
tant qualities, civilized man could scarcely claim superiority 
over the savage. Some savage races seem even to possess cer- 
tain moral qualities in greater degree than civilized men. Trav- 
elers have frequently praised the honesty of certain tribes, their 
fidelity to their friends, their courage, and their fortitude. Civ- 
ilized nations are each possessed of certain characteristic vices 
which can scarcely be apologized for, much less defended. One 
who thinks that the peculiar virtues of the savage and the pecu- 
liar vices of the civilized man are the important virtues and 
vices will certainly reach the conclusion that the savage is 
really superior morally to the civilized man. But it is very 
easy to be mistaken in one's emphasis. We need to consider 
carefully what qualities really give superiority to a people. 

Our present problem is to form some sort of intelligent opin- 
ion as to the qualities which a people need in order to become 
prosperous, powerful, and great in an economic and worldly 
sense. The following outline is suggested as expressing a ten- 
tative opinion on this subject. Whatever may be said on purely 
religious or moral grounds, a nation whose people are possessed 
of these qualities in superior degree will have an economic ad- 
vantage, other things equal, over a nation whose people possess 
them in less degree. 

THE CHARACTERISTICS OF A CAPABLE RACE 

1. Knowledge of 

a. The physical environment 

b. The social environment 

2. Forethought, as shown by 

a. Industry 
h. Thrift 

3. Dcpendableness, made up of 

a. Honesty 

b. Sobriety 

c. Courage 

d. Fidelity 



126 . PRINCIPLES OF NATIONAL ECONOMY 

4. Reasonableness, as shown by 

a. Eagerness to learn 

b. Obedience to law 

c. Willingness to cooperate 

Man has achieved ^'dominion over the fish of the sea, and 
over the fowl of the air, and over the cattle, and over all the 
earth" by reason of certain powers or qualities which he pos- 
sesses in higher degree than they. These are, first, his greater 
knowledge of and control over the forces of nature ; second, his 
greater forethought in making provision for the future and 
working for distinct ends ; third, his greater power of organi- 
zation, or teamwork. This power of organization is the result 
mainly of two factors, — his dependability and his reasonable- 
ness. The same powers, or qualities, have given the civilized 
man dominion over the savage, and the intellectual man domin- 
ion over the ignorant man. In the future, as in the past, we 
must expect that the world will be ruled by the nations which 
possess these qualities in the highest degree. 

Physical advantages over the brutes. Man's erect posture, 
leaving his hands free to be usfed for other purposes than 
locomotion, must be counted as a great advantage over the 
brute creation. A thumb which opposes the fingers and gives 
him a better grasp adds greatly to this advantage. These ad- 
vantages, however, would not count for much if he did not have 
a mind which enabled him to devise tools to be grasped and 
used with his thumbed hands. So far as the upright posture 
and the thumb are concerned, while they give him an advantage 
over the brutes, they alone do not give the civilized man any 
advantage over the savage. The posture of the savage is as 
upright and his thumb as handy as the civilized man's. In 
seeking, therefore, the advantages which have given the civi- 
lized man dominion over the savage we must look at the mental 
and moral qualities. These are not necessarily physiological in 
their nature; they may be mainly the results of accumulated 
history, tradition, and training. 



THE QUALITY OF THE PEOPLE 12 7 

'Intellectual advantages of civilized men over savages. Knowl- 
edge of the forces of nature may almost be said to include 
control over them, though the erect posture and the thumb 
assist in that control. Our physical environment includes not 
only the physical objects which surround us but their proper- 
ties and the forces which govern them as well. To know our 
physical environment, therefore, means to know the properties 
of matter and the forces which operate in and through it. In 
short, this is to have scientific knowledge. It is this which 
underlies all our mechanical improvements. Our social environ- 
ment includes human beings and all their powers, charac- 
teristics, habits, emotions, etc. A knowledge of one's social 
environment includes such a knowledge of man and his ways as 
to enable one to work with other men comfortably, knowing 
what to expect and what to depend upon. This is particularly 
important in those who are intrusted with the work of governing 
or administering the affairs of government. 

Forethought. Forethought is only one aspect of what may 
be called the time sense. Among the many definitions of man 
is one which says that he is the being ''who looks before and 
after." His memory of the distant past and his forethought 
for the distant future modify his actions in the immediate 
present more than the actions of any other creature are modi- 
fied. But the past cannot be changed ; only the future now 
lies within our control. Even industry is chiefly carried on 
because of the vivid appreciation in the present of those needs 
which are certain to arise in the future. Those creatures which 
appreciate future needs most vividly will, of course, labor most 
assiduously. The same difference shows itself among men. 
Those nations, as well as those individuals, who see most clearly 
in advance what their future needs are likely to be are the 
nations and the individuals who show the greatest industry 
as well as the greatest thrift. 

Thrift. Thrift differs from industry in that it consists in 
saving that which is already produced or possessed, whereas 



128 PRINCIPLES OF NATIONAL ECONOMY 

industry consists in producing or gaining possession of desir- 
able objects. Even more than industry, thrift is a mark of fore- 
thought. It requires an even stronger self-control, combined 
with a keener sense of the importance of future needs, to lead 
one to refrain from consuming that which is already produced 
than it does to work to produce that which does not yet exist. 
However, the two things must always go together, in the com- 
munity at least, if not in the individual. The farmer, that is 
some farmer, must save seed before any farmer can labor suc- 
cessfully at the growing of next year's crop. One may, how- 
ever, save the seed which another plants. There are some 
savages so thriftless as not to be able even to save seed. Need- 
less to say, their industry, even if they were industrious, would 
not count for much. If cattle are benevolently given to them, 
they kill them all in time of scarcity. Therefore they cannot 
succeed even as herdsmen, but fall back into a lower economic 
stage ; namely, hunting and fishing. Such people are not likely 
to grow powerful enough to occasion much uneasiness to the 
rest of the world. Even if there were no other reasons for 
their weakness, they could never support numbers enough to 
be very strong. 

Knowledge and forethought are primarily mental qualities, 
though there is an element of morality in forethought ; depend- 
ableness and reasonableness are primarily moral qualities, 
though there is an element of mentality in both of them. In 
this age of great mental achievements, especially in the field 
of physical science and mechanical invention, there is a tend- 
ency to underestimate the importance of moral qualities. This 
tendency may have been increased by the perception that moral 
teachers themselves have sometimes overemphasized the lesser 
virtues — that is, those which count least in the improvement 
of social life — and underemphasized the greater, that is, those 
which count most. 

Moral advantages of civilized men over savages, — dependable- 
ness. Nothing can be more important in the building of a great 
and prosperous nation than dependableness. Many writers 



THE QUALITY OF THE PEOPLE 1 29 

have taken pains to point out how dependent we are upon one 
another in a highly civilized state. One way of illustrating this 
mutual dependence is by comparing a highly developed society 
to a complicated machine or a highly developed animal organ- 
ism. There are many striking resemblances, among the most 
important of which is the interdependence of parts. This 
interdependence of parts increases as we ascend in the scale of 
organic life. In the human body, for example, or in that of 
any of the higher mammals the interdependence of parts is 
much greater than that found in the bodies of the lower forms 
of life. The same change is noticeable as we ascend in the 
scale of social life. Each individual tends to specialize in some 
particular kind of work and to depend upon other individuals, 
who have specialized on other kinds of work, to supply him 
with goods and services which he cannot produce for himself. 
Some of the reasons why this is so advantageous will be dis- 
cussed in the chapter on The Division of Labor. 

There can be no great amount of dependence of one upon 
another where the people are not dependable. This is equally 
true of a machine or an animal organism, but we do not attrib- 
ute moral qualities to the parts of any of them. The wheel in 
a machine has no choice. It must of physical necessity do what- 
ever its construction requires it to do. But if the machine be not 
well made, so that some part is not compelled to work harmoni- 
ously with every other part, the whole machine will work very 
imperfectly or not at all. Similarly, if one part of the animal 
organism, especially of a highly developed organism, should fail 
to perform its functions, every other part is likely to suffer, and 
the whole organism may even die. Although there is no physi- 
cal necessity compelling a person to be dependable, as is the 
case with the parts of a well-made machine or the organs of 
a healthy body, yet it is just as important that he should be, 
otherwise civilization cannot advance at all. 

Our mutual dependence is of various sorts and degrees. If 
someone fails to do that which he is expected to do, he may 
imperil the lives of hundreds or thousands of his fellow men, 



130 PRINCIPLES OF NATIONAL ECONOMY 

as in the case of a switch tender or a locomotive engineer ; he 
may occasion the loss of valuable property ; or he may, as in the 
case of an unpunctual person, merely upset our calculations and 
cause many of us to waste our time waiting for him or guessing 
what he is likely to do. In all these cases, in greater or less 
degree, he occasions loss to the nation. The time we waste on 
account of his lack of dependableness is as truly a loss as the 
property which is destroyed. Aside from the direct loss of time 
and property, there is the greater loss which comes from the 
discouragement of enterprise, the lack of confidence, and the 
general demoralization which ensues when men can no longer 
rely upon one another. When we can no longer depend upon 
others to do their special work well and regularly, we shall have 
to learn to do everything for ourselves. 

Honesty. The first element in dependableness is common 
honesty. Men who will not keep their word, fulfill their con- 
tracts, or do business without cheating are not only morally 
odious, they are also obstructions to the progress and prosperity 
of the community. Perhaps this is why they are morally odious. 
A community made up of such people, no matter how gifted 
they might be mentally, could scarcely prosper. No one could 
trust anyone else, consequently there could be no credit. Noth- 
ing could be bought or sold without the closest and most minute 
inspection, and this would be laborious and therefore wasteful 
of time. There could be no cooperation or teamwork, but 
everyone would have to look after himself and spend a great 
deal of time watching his dishonest neighbors. Among the 
many advantages of honesty, therefore, not the least is that it 
is a great labor-saving device when it is practiced throughout a 
community. Of two communities which are otherwise equal, 
the one within which honesty prevails will advance more rapidly 
in prosperity and power than the one in which dishonesty 
prevails. 

Sobriety. Next to honesty, sobriety is probably the most 
important element in dependableness. In a rudimentary state 
of society, where each individual works and acts most of the 



THE QUALITY OF THE PEOPLE 13 1 

time alone, and where, therefore, there is Httle interdependence, 
drunkenness may not be so vicious as it has now become. In 
our interlocking civilization no personal habit or vice so unfits 
a man for usefulness as drunkenness. If you had to take your 
choice between riding behind a locomotive engineer who was 
addicted to drunkenness and riding behind one who was ad- 
dicted to any other vice, there is not much doubt as to which 
you would choose. If you had to take your choice between a 
chauffeur who was in the habit of getting drunk and one who 
had formed any other bad habit whatsoever, you would not be 
likely to take the drunkard. Apply a similar test to anyone in 
any of the hundreds of responsible positions and you will reach 
the conclusion that the person who is addicted to drink is about 
the least desirable citizen you can name. There are fewer 
places where he is of any use and more where he is a menace 
than is the case with the victims of any other vice. Whatever 
you may think when you are discussing, in the abstract, the 
relative harmfulness of various vices, you are not likely to be 
much in doubt when you come to a concrete case like that of a 
locomotive engineer, a switchman, a driver of an automobile, or 
even a janitor or anyone else whose lack of dependableness 
might endanger your life. Sobriety must obviously rank high 
among the virtues which go to make up what we have called 
dependableness. 

Courage. Courage is the father of many virtues, as fear is 
of many vices. It is probable that as many falsehoods result 
from fear as from malice. In any kind of emergency you will 
want dependable companions who will not fail you. Their de- 
pendableness will be in proportion to their courage. Even your 
own courage may depend partly upon their courage, and theirs 
upon yours ; that is to say, when you feel that you can rely 
upon one another you will all feel more courageous and more 
capable of coping with a difficult situation than if each of you 
doubts the courage of the others. This applies not only to physi- 
cal courage in a time of physical danger but to moral courage in 
times when the larger interests of society are at stake. Men of 



132 



PRINCIPLES OF NATIONAL ECONOMY 



little courage fear to come out on the right side, and even men 
of real courage have their confidence shaken by the feeling that 
they cannot depend upon their fellow citizens. 

Fidelity. Fidelity is closely related both to honesty and to 
courage and serves much the same purpose. It is the quality 
which keeps faith even though one might gain some individual 
advantage by breaking faith. The habit of breaking faith or 
abusing confidence demoralizes a group or a community and 
makes any kind of effective teamwork impossible. 

There are doubtless many other elements which contribute 
to the dependableness of a people, but the four mentioned are 
the principal ones. Any group of people who possess these four 
in high degree can rely upon and cooperate with one another 
and carry out any form of teamwork which they have the intel- 
ligence to plan. A community whose people are weak in any 
one of these four qualities will have difficulty in carrying out 
any effective scheme of group action, no matter how clearly 
they perceive the advantage of doing so. While these are moral 
qualities, nevertheless the economic prosperity of the nation 
depends upon them. They are, therefore, of just as much 
interest to the economist as good tools, good land, or any 
other factor. 

Reasonableness. Reasonableness is a noticeable character- 
istic of progressive people, as its absence is of unprogressive 
people. It includes freedom from prejudice, passion, and super- 
stition, and willingness to take a sensible view of things and to 
be guided by sound judgment rather than by stubbornness and 
general contrariness. It is opposed equally to the slavish fol- 
lowing of old customs, on the one hand, and blind and headlong 
pursuit of new fads, on the other. It involves a frank recogni- 
tion of all the necessary conditions of social life and teamwork 
and a willingness to submit to those conditions even at some 
inconvenience to self. It involves the willingness to help in any 
genuine reform movement, even at some loss or danger to self, 
and likewise a recognition of the necessary and legally consti- 
tuted methods of effective reform. 



THE QUALITY OF THE PEOPLE 133 

Teachableness. The first element in reasonableness is teach- 
ableness, or eagerness to learn, especially to learn better ways 
of doing the work which we have to do. Travelers among back- 
ward races give many strange accounts, not simply of the inef- 
fective methods of work, which we might expect, but of the 
unwillingness of the people to learn new ways even when they 
are shown. One railroad builder who was forced to employ 
native labor in a backward country, which need not be named, 
found that they were accustomed to carry all burdens on their 
heads. In moving dirt they insisted even on carrying it in boxes 
and various receptacles on their heads. He supplied them with 
wheelbarrows and gave orders that they were to use these and 
nothing else. They used the wheelbarrows, but carried them 
also on their heads ; and nothing could induce them to change 
their immemorial custom. Another story from another back- 
ward country relates how an enterprising American undertook 
to substitute some well-made American carts for the exceed- 
ingly clumsy and inefficient carts then in use. The native team- 
sters refused to adopt the innovation, giving as their reason 
that the new carts were too silent, that they missed the screech- 
ing made by the wheels turning on the heavy wooden axles of 
their old carts. Similar illustrations could be repeated by the 
hundred if necessary. No nation whose people are so unteach- 
able as these illustrations indicate is likely to become pros- 
perous, or great in any sense, no matter how well endowed it 
may be with natural resources. Such nations will always re- 
main at the mercy of the stronger nations and will survive only 
because their stronger neighbors show enough moral self- 
restraint to refrain from conquering them. 

This difficulty is not simply a lack of knowledge. It is more 
fundamental than that. It is a habit of mind which resists 
knowledge, — which refuses to accept knowledge even when it 
is presented. Whether this is due to some defect in the physiol- 
ogy of the people or merely to bad teaching in the past it may 
be difficult to determine. That there are constitutional differ- 
ences of this kind among peoples there can be little reasonable 



134 PRINCIPLES OF NATIONAL ECONOMY 

doubt. To some the pain of a new idea is so considerable that 
they prefer to endure poverty and hardship rather than the 
painful process of learning better ways of doing things. To 
others the painfulness of learning is so slight as to place no 
obstacles in the way of progress. On the other hand, a wise but 
strong ruler who would establish a system of compulsory edu- 
cation and rigidly enforce it could doubtless accomplish a great 
deal in the way of increasing the teachableness of the people. 
During their enforced schooling they would form the habit of 
learning, and the pain of a new idea would be greatly reduced. 
A wise majority in a democracy might do the same thing for 
an unwise minority. 

Even in what passes for a progressive nation and among 
people who are ranked as moderately intelligent there survive 
many practices which can be regarded only as superstitions. 
Some farmers still plant their potatoes in the dark of the moon 
rather than when the soil and the weather conditions are right. 
Others observe ceremonies of various kinds which have not the 
slightest relation to the laws of plant or animal growth. Still 
others refuse to submit to rules or to adopt practices which 
have been proved to have scientific value, either because it is 
contrary to their religion or because it is not the way they and 
their fathers have always done. Among others besides farmers 
there is sometimes a prejudice against "book learning," even 
after the book learning has proved itself a practical thing. 

Covetousness. There is another form of unreasonableness, 
and it is probably the most destructive of all, which takes the 
form of jealousy or resentfulness at the success of other people. 
It is the worst form, perhaps the only real form, of covetous- 
ness. There are few things which so deaden the enterprising 
and constructive spirit of a people as this form of resentfulness, 
and there are few things which so encourage that spirit as a 
generous appreciation, on the part of everyone, of real achieve- 
ment wherever it is found. 

Obedience to law. Another important element in reasonable- 
ness is the recognition of the fact that if we are going to live 



THE QUALITY OF THE PEOPLE 135 

together in groups it is necessary for each of us to submit to 
many regulations, some of them at times irksome, which would 
be unnecessary if we could live as isolated individuals. This is 
commonly called obedience to law. This need not be a slavish 
acceptance of all laws as they now stand, but it at least involves 
a recognition of the orderly and legally constituted methods of 
changing laws, rather than a stubborn and brutal defiance of 
those which we do not happen to like. The purpose of law is 
not to repress or obstruct, but to make free, — to release energy. 
The traffic policeman on a crowded street corner may be taken 
as a good illustration of all enforcement of law. He is not 
there to obstruct or hinder traffic, though he undoubtedly does 
hinder some unreasonable people from doing what they would 
like to do. But as the result of such hindrances traffic can 
move more freely than it could without them, and thus the 
average person actually enjoys greater freedom of movement 
than would otherwise be possible. A reasonable person always 
recognizes this fact and submits to such regulations. Only an 
unreasonable person finds them irksome or refuses a willing 
obedience. 

The world has generally been dominated by peoples who 
were law-abiding. No nation whose people refuse to submit to 
the necessary regulations could ever hope to grow prosperous 
or powerful enough to play much of a part in civilization. It 
would be as reasonable to expect a disorganized mob, each in- 
dividual of which followed his own whims, to succeed against 
a well-organized and well-disciplined army. The type of dis- 
cipline and regulation is different, but the necessity is just 
as great in a nation at peace as in a nation at war. The results 
of a lack of discipline come more quickly in war than in peace, 
but they are no more certain in the one case than in the other. 
It is particularly important that this kind of reasonableness 
shall exist in a democracy. Under a despotism the subjects may 
be compelled by fear to submit to regulations; in a democracy 
submission must be largely voluntary. In other words, it 
depends upon the reasonableness of the people. 



136 PRINCIPLES OF NATIONAL ECONOMY 

Willingness to cooperate. Willingness to cooperate where 
cooperation is desirable, even without legal compulsion, is a 
very important factor in the prosperity of any community. 
Even where everyone agrees that cooperation is needed it is 
frequently difficult to get people to cooperate for community 
work. The reasons are many, and some of them are hard to 
understand. Personal jealousies, old grudges, mutual distrust, 
and even general all-round meanness are given as the principal 
reasons. It is sometimes said that the lack of leaders is the 
great difficulty. It is quite as frequently the lack of followers. 
Everyone wants to be a leader and is not willing to follow any- 
one else. One of the vices of democracy shows itself in many 
cooperative enterprises. Instead of supporting a leader who 
really knows what ought to be done and how to do it, it fre- 
quently happens that the only leader who can win support is 
the one who can wheedle the different factions into a coopera- 
tive mood. His fitness does not consist in the fact that he is 
an expert in the work which is to be done by the group, but in 
the fact that he is an expert in the arts of persuasion, — that he 
is the only one who can overcome the unwillingness of the vari- 
ous factions to cooperate. If they were willing to cooperate 
this sort of leader would not be a necessity, and they could then 
choose a leader who was an expert in the work to be done. 

Even in the larger sense the nation is weak if it must be led 
by one who knows very little about the actual business in hand, 
but knows only how to placate various factions and persuade 
them to undertake the v/ork before them. With such a spirit 
among the people the indispensable man is more likely to be 
the orator or the persuader than the statesman or the adminis- 
trator. A people among whom the efficient man is popular will 
never be outstripped in the arts of peace or beaten in war by a 
people among whom only a demagogue or even a persuasive 
orator can be popular. A people who lack the willingness to 
cooperate in the carrying out of great national plans and pro- 
grams must be persuaded or placated. Lacking a despot, their 



THE QUALITY OF THE PEOPLE 137 

first need is for someone who can wheedle them into doing that 
which they ought to be wilhng to do without wheedHng. Noth- 
ing more unerringly indicates the quality of the people than 
the kind of leaders they pick out or follow. If they habitually 
allow themselves to be led by men who are proficient merely 
in the arts of persuasion, they are a weak people. Even that 
which is sometimes called executive ability and which is too 
often a convenient excuse for much stupidity is made necessary 
mainly because people are too weak and vacillating to do what 
they ought to do without a great deal of looking after. If the 
people choose as their leaders men who have clear and sound 
ideas and marked scientific or constructive ability, regardless of 
their proficiency either in the arts of persuasion or in the bluster 
of the "great executive," they are a strong people. As the late 
William James pointed out, one of the purposes of an education 
is to enable us to pick out a good man. 

If we are clear in our minds as to a few of the leading quali- 
ties which a capable race must possess, the next question is, 
How may a nation improve or preserve its capacity for great- 
ness? Our original qualities depend mainly upon heredity; 
our acquired qualities, upon education. Education depends 
mainly upon the educational system and the advantages which 
civilization provides for the accumulation and transmission of 
knowledge. Few of us, unless we have thought seriously about 
it, realize how much of our present knowledge is due to the 
art of printing. By means of the printed book the knowledge 
acquired by one generation may be stored up and bequeathed to 
future generations. Without the printed book it would have to 
be transmitted from generation to generation on the thin air 
by means of the spoken word. Much that is wonderful has 
been transmitted orally, but much also has been lost. Such a 
thing as a lost art is scarcely possible in this age of printing 
presses. But while much of our knowledge is due to the art 
of printing, more, perhaps, is due to the organized plans for 
training each generation during its growing period. A school 



138 PRINCIPLES OF NATIONAL ECONOMY 

system which gives each and every child just the training which 
he needs to fit him for the greatest usefulness is the dream of 
all educators. 

Heredity and training. A great deal has been written regard- 
ing the comparative importance of heredity and training in the 
determination of ability and character. Some have gone to 
the extreme of saying that heredity is everything, that a genius 
will always become a genius in spite of the lack of educational 
advantages, — in short, that he will find his own means of 
education. Others have gone so far as to deny that heredity 
has anything to do with a man's ability ; they claim that it is 
all in his education, including under education all the influences 
that have been at work since his birth in developing his mind 
and shaping his character. The truth, as in most such cases, 
seems to be somewhere between these extremes. There is no 
doubt whatever that men of average natural ability may be 
greatly improved by education and training, nor is there any 
reasonable doubt that some are capable of being trained much 
more highly than others because of a difference in natural 
ability. 

If we consider certain special fields of study — for example, 
music or mathematics — few will doubt that there are differ- 
ences in natural talent for these studies. Any normal person can 
acquire some skill in either of these fields, but there are some 
who are so deficient in natural talent for one or the other that 
no amount of training would ever enable them to become highly 
proficient. There is a strong probability that the same may be 
said of any special kind of ability or skill which might be 
named, but in our complex civilization so many kinds of ability 
and skill are required that almost anyone can find some field 
of work in which he may become skilled, though there may be 
no good market for the kind of work in which he excels or there 
may be so many others possessing the same kind of ability as to 
overstock the market. In either case the individual, however 
skillful or capable in that special field, may find it hard to make 
a living. 



THE QUALITY OF THE PEOPLE 1 39 

Whatever may be said regarding the relative importance of 
the natural ability of the people and their training, it is abso- 
lutely certain that it is more important for the present genera- 
tion to give attention to the problem of its own training than to 
the problem of its own heredity. The latter cannot now be 
changed, and there is no use worrying about it. The only thing 
to do is to make the most of its inheritance and see that it gets 
the best possible training. But when we look to the future, 
there is much to be said in favor of giving attention to the 
question of the heredity of future generations. If the most 
capable men and women of this and succeeding generations 
marry and have larger families than the less capable, and if the 
least capable, the feeble-minded, and the defective are prevented 
from reproducing their kind, we may expect a gradual im- 
provement, generation after generation, in the native and in- 
herited quality of the stock. If, on the other hand, many of the 
most capable do not marry at all, and if the othisrs marry late 
and have small families, whereas the less capable have larger 
families, while the feeble-minded and defective multiply most 
rapidly of all, we must expect a gradual deterioration in the 
stock, generation after generation. 

The age of marriage. Aside from the difference in the size 
of families the mere difference in the age of marriage will make 
a great difference in the rate of increase of different classes. Let 
us suppose, for example, that there are two groups of people, 
which we will call groups A and B, containing a thousand per- 
sons each, each group having different habits with respect to 
the age of marriage. In group A marriage takes place so early, 
on the average, that there is an average of twenty-five years 
between generations. That is, the average parent is just twenty- 
five years older than the average child, enough children being 
born before the parents are twenty-five to balance those who are 
born afterward. In group B, on the other hand, marriages take 
place so late that there is an average of thirty-three and a third 
years between generations. Let us assume, further, that the 
number of children brought to maturity in the average family is 



140 PRINCIPLES OF NATIONAL ECONOMY 

the same in the two groups, and that this average number is 
four ; that is, in both groups the average married couple brings 
four children to maturity and marries them off. The total num- 
ber in each group, therefore, doubles in each generation. But 
group A will double four times in a hundred years, whereas 
group B will double only three times. Under these circum- 
stances group A will have increased from one thousand to six- 
teen thousand at the end of a hundred years^ whereas group B 
will have increased to only eight thousand. If, in addition to 
this, group B should have fewer children on the average, so that 
they doubled only once in two generations, the contrast would 
be still greater. In this case they would number fewer than 
three thousand at the end of a hundred years. If, through so 
many failing to marry at all and the rest having so few chil- 
dren, they should not increase at all from generation to genera- 
tion, the two groups, at the end of the century, would bear the 
ratio of i6 to i. Now it is rather obvious, is it not, that it 
makes a great deal of difference whether group A represents 
the more capable men and women in our nation and group B 
the less capable, or vice versa ? 



CHAPTER VIII 
THE GEOGRAPHICAL SITUATION 

The human factor is the most important factor in national 
prosperity. Nevertheless the natural situation is a factor which 
must be taken into consideration. However gifted and cour- 
ageous a race may be, it will find it easier to expand and become 
prosperous, powerful, and great in a favorable than in an 
unfavorable environment. 

Importance of environment. But what is a favorable en- 
vironment ? It is easy to overemphasize the bodily comfort of 
living in a warm as opposed to a hot or a cold climate and to 
ignore the bracing effects of changeable weather. It is also easy 
to overemphasize the tremendous productivity of certain tropi- 
cal regions and to forget that they produce the enemies as well 
as the friends of man in great profusion. It is equally easy to 
go too far in the opposite direction and to hold that hard condi- 
tions, such as a harsh climate and a sterile soil, are best for 
man's development. If hard conditions are all that men need 
the Eskimos of the Far North are peculiarly blessed. 

Advantages of the temperate zones. If we take everything 
into consideration it is probable that the temperate zones are 
most favorable to man's development, as well as to his pros- 
perity. He has here fewer unconquerable enemies than in the 
tropics or in the frigid zones. He finds a wider variety of use- 
ful materials, such as grass, timber, and minerals, and he finds 
them in greater abundance here than elsewhere. Here the 
advantages to be gained by work are more obvious and more 
easily comprehended by the average intellect than anywhere 
else. The intelligence required to see the advantage of building 
shelters, making clothing, and kindling fires, especially in a 

141 



142 PRINCIPLES OF NATIONAL ECONOMY 

place where, along with the cold weather, there is an abundance 
of material suitable for these purposes, is not very great. It 
requires much more scientific knowledge to enable men to 
guard against the hookworm and the various harmful bacteria 
which infest the tropics. These, together with venomous in- 
sects and reptiles, not to mention the larger beasts of prey, im- 
peril the lives of the dwellers in the tropics quite as much as 
our cold winters imperil the lives of dwellers in these northern 
latitudes. 

Northern-grown crops are generally best. It is a fact of 
observation, however we may account for it, that many of our 
farm crops reach their highest perfection very near the northern 
limits of the areas within which they can be grown without 
injury from frost. The Cotton Belt of this country, though con- 
fined to the Southern states, is in reality near the northern limit 
for cotton. Our Corn Belt is likewise near the northern limit 
for corn. The oranges of California and Florida are likewise 
grown near the line where frost will destroy the crop. The 
potato and the sugar beet do better either, in high altitudes or in 
high latitudes, where the summers are barely warm enough and 
the seasons barely long enough to mature the crop. One ex- 
planation of this general rule is that by migrating northward 
a plant escapes many of its ancient and hereditary enemies. 
When seed corn is saved, dried, and protected during the winter, 
and special care given it during the growing season, it can grow 
farther north than would be possible if it had to shift for 
itself. Its natural enemies in its original habitat, not having 
man's help, cannot live over winter or mature between frosts in 
our Corn Belt. Therefore the corn plant escapes some of its 
worst enemies. The same is true of the cotton plant, though 
some of its ancient enemies seem to be following it northward, 
and also of other plants which seem to flourish under cultivation 
in latitudes where they could not survive without cultivation. 
This is one important factor in enabling large numbers of men 
to produce an adequate food supply in northern latitudes. Simi- 
larly, when man learns to keep himself warm by building houses, 



THE GEOGRAPHICAL SITUATION 143 

manufacturing clothing, and making fires, he can live in lati- 
tudes which enable him to escape some of his ancient and hered- 
itary enemies, such as the hookworm and the germs of yellow 
fever, malaria, etc. The northern limit of his best development, 
however, must coincide with the northern limits of the produc- 
tion of abundant means of satisfying his multifarious desires. 
Another advantage of growing food crops as far north as the 
seasons will permit is that during the summer the days are 
longer in high than in low latitudes. This gives plants more 
light while they are growing. The proportion of sugar in sugar 
beets, for example, seems to depend partly upon the amount 
of sunlight which they get while they are growing. 

Buckle's generalizations. In his famous work ''The History 
of Civilization in England" Henry Thomas Buckle makes a 
great deal of several other factors in the geographical situation. 
These he groups under four heads ; namely, climate, food, soil, 
and the general aspect of nature. He goes to the extreme of 
attributing to these factors a controlling influence not only on 
the economic prosperity of the people but even on their intel- 
lectual, moral, and religious development as well. Without fol- 
lowing him to these extremes we may profitably give attention 
to some of his o]t)servations regarding the influence exercised 
by these factors on the industrial development of a people. No 
one is likely to deny that the presence of cheap coal has had a 
great deal to do with the economic development of Europe and 
America, or that the former abundance of timber in this coun- 
try had a great deal to do with the kind of houses we built and 
are still building. A shingled roof, for example, is unknown 
except in countries where timber has been abundant. 

That ancient civilizations arose in regions where labor applied 
to land was highly productive is a commonplace in history. 
The fertile river valleys of Egypt, Mesopotamia, India, and 
China supported civilizations when our European ancestors 
were still savages. Here food was so abundant that men had 
time to do other things besides satisfying their immediate daily 
needs ; or, rather, a part of the population could produce food 



144 PRINCIPLES OF NATIONAL ECONOMY 

enough to support the rest while the latter gave their time to 
other things. Art, architecture, philosophy, religion, and gov- 
ernment could, therefore, flourish. The civilizations which have 
grown up since then in latitudes farther north may not have 
exceeded those earlier civilizations in physical magnificence, 
but they have exceeded them in all that makes for the comfort 
and well-being of the average man. 

On the other hand, the overpowering influence of the terrific 
productiveness of nature in certain tropical regions is sufficient 
to discourage man's enterprise. Kipling's story entitled "Let- 
ting in the Jungle^" gives a vivid picture of the way in which 
the jungle struggles to reassert itself, — to flow back, as it were, 
upon a cleared area and overwhelm it as with a flood of rank 
vegetation. Concerning India^ Buckle writes : 

Besides the dangers incidental to tropical climates, there are those 
noble mountains which seem to touch the sky, and from whose sides 
are discharged mighty rivers which no art can divert from their 
course and which no bridge has ever been able to span. There, too, 
are impassable forests, whole countries lined with interminable jungle, 
and beyond them, again, dreary and boundless deserts, — a;ll teaching 
man his own feebleness and his inability to cope with natural forces. 
Without, and on either side, there are great seas, ravaged by tempests 
far more destructive than any known in Europe, and of such violence 
that it is impossible to guard against their effects. And as if in 
those regions everything combined to cramp the activity of man, 
the whole line of coast from the mouth of the Ganges to the extreme 
south of the peninsula does not contain a single safe and capacious 
harbor, not one port that affords a refuge which is perhaps more 
necessary there than in any other part of the world. 

In contrast with India, Buckle points to Greece as a country 
where everything invites man to dominate. There is nothing 
to terrify or overwhelm him. Everything tends to exalt the 
dignity of man, while in India everything tends to depress it. 

The zone of the founders of religion. Peschel, in his "Races 
of Man," quotes from an old Arabian geographer who divided 

1 In "The Second Jungle Book." 



THE GEOGRAPHICAL SITUATION 145 

the earth into zones, one of which, that between 19° and 33° 49' 
north latitude, was the zone of the founders of religion. He 
points out that in this zone were born all the great founders of 
religion and all the philosophers and scholars, himself included. 
Zoroaster, Moses, Buddha^ Christ, and Mohammed were all 
born in that zone. Regarding the influence of the desert upon 
the mind, Peschel writes : 

All who have been in the desert exalt its beneficent influence on 
the health and spirits. Aloys Sprenger declares that the air of the 
desert invigorated him more than that of the high Alps or of the 
Himalayas. . . . The desert has impressed the Arabs with their re- 
markable historical character. In the boundless plains the imagina- 
tion which guides the youth of men is filled with images quite 
different from those suggested by forest country. The thoughts thus 
acquired are noble rather than numerous. . . . Every traveler who 
has crossed the deserts of Arabia and Asia Minor speaks enthusi- 
astically of their beauties. All praise their atmosphere and brightness 
and tell of a feeling of invigoration and a perceptible increase of 
intellectual elasticity ; hence, between the arched heaven and the 
unbounded expanse of plain, a monotheistic frame of mind necessarily 
steals upon the children of the desert. 

Professor Ellsworth Huntington,^ on the other hand, finds 
greater stimulus to mental activity in a changeable climate 
with frequent variations of temperature. 

The geographical advantages of the United States. Coming 
to our own country, we have a combination of most of the 
geographical factors mentioned by Buckle and others. We have 
the broken landscape, low mountain ranges, and small rivers 
of the Atlantic seaboard ; the great fertile valley of the Missis- 
sippi and its tributaries, the vast plains of the great West^ the 
semidesert conditions of the Southwest, the towering mountain 
ranges of the Rockies and the Sierras, and the mild climate and 
gentle slopes of the Pacific coast. If the mind of man is strongly 

iThe Pulse of Asia. See also "Climatic Changes and Agricultural Exhaus- 
tion as Elements in the Fall of Rome," Quarterly Journal of Economics, 
February, 191 7. 



146 PRINCIPLES OF NATIONAL ECONOMY 

influenced by its geographical surroundings, we have an oppor- 
tunity of developing a many-sided and variegated civilization. 

The eastern half of the United States, being virtually sur- 
rounded on three sides by water, like the greater part of Europe, 
is assured of an adequate quantity of moisture ; the western 
half is more or less deficient in moisture, except the extreme 
northwest corner and certain high mountain altitudes. These 
arid and semiarid regions, where the streams do not supply 
water enough for irrigation, may, in places where conditions 
are favorable, be made to grow crops under methods known as 
dry farming. The rest will probably be a permanent grazing 
country. Even our irrigable land, while but a fraction of the 
total, amounts to a small empire in itself. 

A broad strip running from the Atlantic seaboard to the 
hundredth meridian, and a little north of the middle, comprises 
the great grain, hay, and live-stock region. Another broad strip, 
lying south of this, is the Cotton Belt. Along our northern 
border from Maine to northern New York is a lumber, dairy, 
and potato region and a natural summer playground for the 
city people. A continuation of this strip, including the northern 
halves of Michigan, Wisconsin, and Minnesota, is an undevel- 
oped region, formerly covered with forest but now largely cut 
over. Most of it is excellent land for potatoes and small 
grains and is capable of feeding a vast population. Another 
undeveloped strip along the Gulf coast from Florida to Texas, 
just south of the Cotton Belt, is also largely cut-over timber- 
land. Much of this is ideal land for fruit and truck farming 
and the growing of such great food crops as sweet potatoes and 
peanuts. Whenever the demand for food is such as to insure a 
remunerative price for potatoes, both white and sweet, almost 
unimaginable quantities can be grown along our northern and 
southern borders without interfering with the growing of corn, 
wheat, or cotton in the belts which are especially adapted to 
these great crops. So far as starchy food is concerned we have 
opportunities for producing incalculable quantities. Animal 
products also can be produced in quantities sufficient for a pop- 



THE GEOGRAPHICAL SITUATION 147 

ulation very much greater than the present, though it is easy 
for unthinking people greatly to exaggerate the possibilities in 
this direction. 

The Mississippi Valley (that is, the whole interior basin of 
the country) is one of the most productive regions in the entire 
world. In fact, it is doubtful if any region of equal area can 
be found anywhere on the globe which contains so great a 
variety and abundance of natural riches, both on the surface 
and beneath the surface. This region includes the greater part 
of our Cotton Belt, and we produce nearly three fourths of the 
cotton of the world. It includes all of what is known as our 
Corn Belt; that is, the region where corn is the main crop, 
though corn is grown in every state in the Union. Corn is not 
only our most valuable crop but our most valuable single prod- 
uct of any kind or description; we also grow nearly three 
fourths of the world's production of this, the most magnificent 
of all crops. In this region also are the great spring-wheat 
areas of Minnesota and the Dakotas and the winter-wheat area 
extending from Ohio to the Great Plains, reaching its greatest 
density in Kansas and Nebraska. While we produce on the 
average only between a fourth and a third of the world's total 
wheat crop, we yet produce more than any other single country 
at the present time. Aside from these major crops, this region 
is also rich in a number of minor crops and grows practically 
everything which will grow outside the tropics. 

Farm machinery. The reasons for this great productivity 
are, first, the vast area ; second, the uniform fertility of the 
soil; third, the uniformly level contour, making farm opera- 
tions relatively easy and inexpensive ; fourth, the uniformly 
favorable climate ; and, fifth, the general use of farm machin- 
ery. There is probably no single area in the world where so 
much and such efficient farm machinery is used in order to 
supplement the labor of men. 

In addition to the natural ingenuity of our people, the general 
smoothness of the land and the favorableness of the climate 
must be held to account for the use of farm machinery. The 



148 PRINCIPLES OF NATIONAL ECONOMY 

summers (especially the late summer months) in this region 
are relatively dry. This has had an important effect in encour- 
aging the use of harvesting and hay-making machinery. In 
some of the countries of northwestern Europe, where clear, dry 
weather is rare, the curing of hay and the drying of harvested 
grain are more difficult problems than with us. The quick 
curing and rapid methods of harvesting and storing which are 
familiar to us are there impossible. 

Not the least important feature of the geographical situation 
of any country is the opportunity which it offers for specializa- 
tion. This isr sometimes called the opportunity for trade and 
commerce. Trade and commerce, however, are good only be- 
cause they enable each country or each neighborhood to special- 
ize in production ; that is, to produce the things for which it 
is best fitted. This would not be possible without trade and 
commerce. That is to say, each neighborhood would have to 
produce everything its people needed if it could not get some of 
these things from other neighborhoods. When it can get almost 
anything it needs from other neighborhoods, provided it has 
something to give in exchange, it can then devote its own ener- 
gies and resources to the production of those things in which it 
excels, or for which it is best fitted, and exchange its surplus 
of those things for other things which it happens to need. Spe- 
cialization in production depends, therefore, on opportunities 
for trade and commerce. 

A wide area with great diversity of geographical conditions, 
such as differences of temperature, rainfall, altitude, soil, and 
mineral deposits, permits great specialization, provided the dif- 
ferent localities can exchange products. This is largely a matter 
of transportation. A small area, with little diversity of re- 
sources and, at the same time, isolated with respect to trans- 
portation, would be at a great disadvantage. With little diversity 
of natural resources it would have difficulty in producing every- 
thing it needed. Isolated with respect to transportation, it 
would have difficulty in getting from the outside the things it 
could not produce at home. 



THE GEOGRAPHICAL SITUATION 1 49 

COLLATERAL READING 

Ely, Richard T., Hess, Ralph H., Leith, Charles K., and Carver, 
Thomas Nixon. The Foundations of National Prosperity. New York, 191 7. 
(Four essays on various aspects of conservation, including the conservation of 
human resources.) 

Marshall, Alfred. Principles of Economics (fifth edition). New York, 
1 907. (An exposition of fundamental notions by the leading English economists.) 

PiGOU, A. G. The Economics of Welfare. London, 1920. 

WiCKSTEED, Philip. The Common Sense of Political Economy, Book I, 
chaps, i, ii, and iii. London, 1910. (A very keen analysis of leading economic 
concepts.) 



PART II. ECONOMIZING THE FACTORS OF 
PRODUCTION 



CHAPTER IX 

THE INTERRELATION OF THE FACTORS OF 
PRODUCTION 

However strongly we believe that this is the best possible 
world and however clearly we see that a bounteous nature has 
provided for the satisfaction of many of our needs we cannot 
help acknowledging that, at any time and in any place where 
we happen to be, some desirable things are scarce, some unde- 
sirable things are abundant, and some things otherwise desir- 
able are so superabundant as to become undesirable. That 
being the case, the obvious thing to do seems to be to set about 
improving the situation, increasing the quantity of those desir- 
able things which are scarce, and decreasing the quantity of 
those things which are too abundant for our well-being or 
comfort. 

The rearrangement of matter. Matter itself cannot, of course, 
be either increased or diminished in quantity. It can be rear- 
ranged in such ways as to become more usable or less harmful. 
This rearrangement may take on various forms. All the ele- 
ments which are now in a loaf of bread were formerly in the 
soil, the water, and the atmosphere. In those forms they were 
of no use to man. They have been rearranged and assembled, — 
their form has been changed. This is sometimes called form- 
utility. The wheat from which the flour was made and the 
flour from which the bread was made had to be transported from 
places where there was a superabundance to a place where 
there was a scarcity, in order that they might become usable. 
This is sometimes called place-utility. Some goods have to be 
stored and preserved. At one time they are so abundant as 
to be unusable. At another time, unless they were preserved, 
they would be so scarce as to cause hardship or even famine. 

153 



154 PRINCIPLES OF NATIONAL ECONOMY 

Their utility is increased by storing and preserving them. This 
is sometimes called time-utility. 

Time is important as well as place. A keen observer has 
remarked that men are engaged in the simple work of moving 
things from one place to another. Whether they are writing 
with pens, putting chemicals into test tubes, rolling steel rails, 
draining swamps^ or irrigating dry land, all that men literally 
do with their hands and their muscles is to move materials. 
They are changing the space relations of things. This observer, 
however, did not see that men are also changing the time rela- 
tions of things, a process which is quite as important as chang- 
ing their space relations. Things must not only be moved from 
one place to another, they must also be preserved and held from 
one time to another. The time relations of things are quite as 
important as their space relations. 

Of course there are methods and purposes in all this moving 
of things. The mind sees method and purpose where the eye 
sees only materials moving. One of the wonderful things about 
man's activity is the vast results that follow a very slight re- 
arrangement of materials. By stirring the soil and placing 
seeds in a certain relation to it, the forces which produce plant 
growth are set to work supplying our needs. By rearranging a 
few stones and clods a stream may be diverted and made to 
water barren fields until they blossom and bear fruit, or the 
stream may be made to turn a wheel and drive machinery which 
can accomplish tasks far too great for human muscles. By 
taking advantage of his knowledge man can, by these slight 
rearrangements of matter, harness natural forces and compel 
them to serve his purpose. 

As stated above, it is quite as important that things be pre- 
served and held from one time to another as that they be moved 
from one place to another. Crops must be preserved from the 
harvest season until other parts of the year ; seed must be saved 
for next year's planting ; tools must be made long in advance of 
their actual use, and the process of making tools is sometimes 
a long-drawn-out process, involving the mining and smelting of 



THE INTERRELATION OF THE FACTORS 155 

ores, the cutting of timber, and many other processes. In fact, 
modern industry consists quite as much in changing the time 
relations of things as in changing their space relations. Work 
done at different times must be coordinated and fitted together ; 
products produced at different times, as well as at different 
places, must be brought together in one time as well as in one 
place. The failure to appreciate the full importance of time 
as a factor in economic adjustment is responsible for a great 
deal of faulty reasoning and many false conclusions. 

Discriminating between friends and enemies. The general 
purpose of all this work of changing the space and time rela- 
tions of things is to increase the objects of desire and decrease 
the objects of repugnance in those times and places where we 
choose to live. The process of increasing the objects of desire 
is called production, and that of decreasing the objects of 
repugnance is called destruction. Frequently these two proc- 
esses are so closely related as to make them difficult to separate. 
In order to increase the number of desirable plants we must 
destroy their rivals, the weeds, as well as the pests which feed 
upon them. Out of the various forms of animal and plant life 
which would live in our neighborhood we choose the more de- 
sirable and make it easy for them to live and multiply, and 
make it hard for the less desirable to survive. 

Man merely holds the balance of power and uses his limited 
physical strength and his superior intellect in giving the advan- 
tage to his friends in the subhuman world and in placing his 
enemies at a disadvantage. In the field of mechanics, likewise, 
by moving a vast number of pieces of matter, thereby bringing 
natural forces into play, he assembles powerful engines. Then, 
as in the case of a locomotive engineer, by a very moderate pres- 
sure he moves a lever which in turn sets powerful forces to work 
serving his purpose. Other engines equally powerful and con- 
trolled with equal ease set powerful forces to work destroying 
his enemies, both human and subhuman. 

One of the labors of Hercules, it will be remembered, was to 
clean the Augean stables. According to the legend three thou- 



156 PRINCIPLES OF NATIONAL ECONOMY 

sand oxen had been stabled there for thirty years and the stalls 
had never been cleaned. Being required to clean these stables 
in one day, Hercules turned the rivers Alpheus and Peneus 
through them and thus accomplished what his monstrous 
strength would not have enabled him to do directly. Very 
commonplace men accomplish greater engineering feats than 
that nowadays. 

What hath man wrought ! Writers who have wished to im- 
press their readers with the vastness of some political or social 
revolution have frequently adopted the device of picturing 
someone as falling, just before the revolution, into a Rip Van 
Winkle sleep and awaking just after the revolution into a new 
world. His perplexity in trying to understand his new sur- 
roundings is not only amusing but usually very instructive. We 
need not adopt the device of whisking someone through an 
interval of time in order to impress him with the change which 
man has wrought in his material surroundings. It is only neces- 
sary to imagine a philosophical savage transported over a few 
hundred miles of space and set down in a modern industrial cen- 
ter. Let us imagine him on a busy corner of some great city, 
where pavements, street-car tracks, curbstones, and sidewalks 
have replaced the native turf ; where, instead of trees, tall build- 
ings of steel and concrete rise hundreds of feet into the air, and 
the narrow strip of blue between is obscured by elevated rail- 
roads, trolley wires, poles, and other obstacles; while the 
ground underneath is honeycombed with cellars and subcellars, 
subways and sub-subways, and a network of sewers, conduits, 
and other subterranean passages. In trying to picture to our- 
selves the surprise and perplexity of our philosophical savage 
we may arrive at some conception of the magnitude of the 
change which man has wrought in his natural environment. 

Man, nature, and tools. The two original factors in this work 
are man and nature, — nature presenting the material to be 
worked upon and also certain powerful forces to aid man in 
his work, and man furnishing the knowledge, the ingenuity, the 
foresight, the patience, and also a certain amount of muscular 



THE INTERRELATION OF THE FACTORS 157 

or physical power to work upon the material which nature 
furnishes. Both the raw material and the natural forces, in 
their elemental state, are commonly included under the name 
"land." Not only the soil fertility and the minerals but also the 
sunlight and sun heat, the rain and the atmosphere, are com- 
monly regarded as the appurtenances of land. The most im- 
portant quality of land is that of extension. Whoever controls 
a portion of the earth's surface gets the benefit thereby of the 
air which lies above it, also of a certain fraction of the sun's 
rays and a certain portion of the rainfall, together with the soil 
and the subsoil immediately below the surface and the moisture 
beneath. Under some systems of law he owns also the minerals 
which are found anywhere beneath the surface. In fact, owner- 
ship of land, under these systems, extends from the center of 
the earth to the uttermost heights above the surface. However, 
we are not, at this point in our discussion, so much interested 
in what is included in the ownership of land as in what is in- 
cluded under land as a factor in production. It may be said to 
include all the materials furnished by nature for man to work 
upon. 

While man and nature are the original and primary factors 
in the problem a very little study will show anyone that man 
would not accomplish very much if he relied solely upon his 
own strength and did not make use of tools to add to the power 
and effectiveness of his efforts. He can strike a harder blow 
with a stone held in the hand than with the hand alone, making 
use of the hardness of the stone and the momentum which goes 
with its weight. When he fits a handle to the stone he can 
strike a still harder blow. When the stone is provided with a 
cutting edge it becomes still more effective for certain purposes. 
By making use of such simple mechanical devices as the lever 
and the inclined plane he can move bodies far too large for the 
meager strength of his unaided muscles. It is a long road but 
a fairly direct one from these simple beginnings to the mighty 
engines and complicated machines of the present day. So im- 
portant have tools become in the economy of a modern nation 



158 PRINCIPLES OF NATIONAL ECONOMY 

that they are generally treated as a third factor of production, 
along with man and nature. While man and nature are the 
original and primary factors, and tools the derived and second- 
ary factors, the latter have become in spite of that fact almost 
as important as either of the original factors. 

Labor. In economic discussions the human factor is usually 
named labor, but it must be remembered that labor includes the 
work of the mind as well as of the body. As a matter of fact, 
'Uabor" was originally used in a much narrower sense. Manage- 
ment, or direction, was assumed to be the real thing, and dis- 
cussions of the problems of production assumed the manager's 
point of view. What were his problems ? First, of course, was 
the problem of supplying himself with the three factors of pro- 
duction, — labor, land, and capital, or tools. Since tools were 
purchasable, a supply of purchasing power was all that was 
necessary in order to get tools. Hence purchasing power came 
to be regarded as equivalent to capital. With a supply of these 
three factors — labor, land, and capital — the manager was pre- 
pared to begin the work of organizing a productive enterprise. 
He needed good labor as well as good land and good tools. An 
adequate supply of labor, land, and capital of good quality has 
generally been regarded, therefore, as the necessary condition in 
national prosperity. But it is quite as important, if not more 
important, that there be capable management. From the la- 
borer's point of view, what he wants is more and better managers 
to hire and direct him, to bid against one another for his labor, 
— not more and better laborers to compete with him. This 
point of view is quite as important as that of the manager, who 
does not feel the need of more and better managers to compete 
with him, but rather of more and better laborers to work 
under his direction. 

There is, however, a certain historical justification for the 
older point of view, which regards labor as a factor of produc- 
tion to be used and directed by the manager, very much as he 
would use other factors of production. A skilled mechanic, 
working in a small shop, or an artist in his studio might employ 



THE INTERRELATION OF THE FACTORS 159 

helpers to do the rough work which did not require much skill. 
In such a case we should still regard the thing produced as the 
product of the mechanic or the artist rather than of his helpers. 
In a larger enterprise, such as building a house, the man who 
undertakes to assemble the materials and put them together 
according to plans and specifications is in a peculiar sense the 
builder of the house. Even though he may never handle a 
brick, a stone, or a piece of timber, the workmen are still, 
in a sense, his helpers and not the real builders. As we pro- 
ceed, however, from these simple cases to more and more 
highly complex cases the employer's function becomes more and 
more highly specialized until it is easy to lose sight of him alto- 
gether and to begin to think of the workmen as the real producers 
instead of mere helpers, and of the employer as a mere profit 
taker instead of the real producer. Even where the employer 
does little except to "get business," he is obviously a most im- 
portant factor in any productive enterprise, and sometimes he 
seems to be the indispensable factor, — the man who could not be 
spared. Where he is the life of the enterprise, and any other 
man could be spared without great harm, he will probably con- 
tinue to regard himself as the real producer and the others as 
his helpers. Under such conditions he will probably continue 
to think and speak of the desirability (to him) of having an 
abundant supply of labor, rather than of having a large number 
of "business getters" to compete with him. 

There are several reasons why it might be better to continue 
using the terms "man," "nature," and "tools," as we have done 
thus far in this chapter, rather than "labor," "land," and "capi- 
tal"; but on the whole it is probably wiser to follow the custom 
of writers on economics and use the latter set of terms. In doing 
so, however, it must be understood that labor includes all effort 
put forth by men, whether that effort be physical or mental or 
a combination of both ; that land includes everything which 
nature, outside of man, provides, even though it be above or 
below the surface of the earth; and that capital includes all 
joint products of man and nature which are used not for direct 



i6o PRINCIPLES OF NATIONAL ECONOMY 

consumption by their owners but for the purpose of aiding the 
latter in getting other goods which they may consume or enjoy. 

Other helps to national prosperity. National prosperity de- 
pends, to be sure, upon many other things, such as organization, 
a good system of laws which encourage rather than discourage 
production, a body of sound and wholesome tradition, and a sys- 
tem of morals under which all vigorous and constructive habits 
are called virtues and are therefore approved and encouraged, 
and all soft and enervating habits of self-indulgence are called 
vices and are therefore disapproved and discouraged. It is also 
important that there be a virile religion which shall lend an 
emotional support to this vigorous type of morality, — which 
shall, in short, create an emotional interest in an austere and 
productive life. However, these three factors, — labor, land, 
and capital, — as we have defined them, are the elementary fac- 
tors. They are the raw materials out of which national pros- 
perity is built. 

Since labor means the human factor in production, it really 
includes not merely the wageworkers but all kinds and classes 
of human beings who have any part in production. It is, of 
course, just as important that there be strong, capable, and well- 
trained men as that there be productive and well-tilled land and 
good tools, machinery, and other equipment. It is not enough 
that the people be capable merely in a general way ; it is neces- 
sary also that they be trained in many specialized forms of 
skill. These specialized forms of skill must naturally be the 
kinds that are needed. One might develop remarkable facility 
in the performance of a certain feat ; but if no one needs to 
have it performed, it is of no advantage either to the performer 
or the community. 

This means that it is necessary to increase the quantity of 
those special forms of ability which seem to be in demand, — 
that there be more men who can do certain important things 
which relatively few are now capable of doing. In our com- 
plex civilization it is not likely that any one individual or one 
kind of skill can produce the whole of any article. It usually 



THE INTERRELATION OF THE FACTORS i6i 

takes several men, each one doing a special kind of work requir- 
ing a special kind of skill, to produce anything. If one special 
kind of skill is lacking the other workers may be helpless. Not 
many years ago a glass manufacturer was planning a new 
branch of his business, in which a new product was to be pro- 
duced and several hundred men were to be employed. Brick 
and mortar and all building materials, as well as tools and 
machines, could easily be procured. All the labor necessary 
for the running of the plant was available except one special 
and highly scientific expert. He could not be found in the 
country. As a consequence the new branch of the business 
could not be started, the new product was not produced, and 
employment was withheld from several hundred men. It was 
obviously very important for that community and for those 
laborers that they should have a larger supply of that special 
scientific and technical ability. One man trained for that kind 
of work might easily have been worth as much to the country 
as a hundred additional men trained for a kind of work for 
which there were thousands of others already trained. 

A highly efficient system of education should have antici- 
pated the need for these experts and should have trained them. 
Given a race of high average natural ability, the problem of 
supplying these highly specialized experts is mainly a matter 
of education. The probability that among a hundred millions of 
people of high ability a few could be found with the capacity 
for the special training needed is so great as to amount to a 
certainty, but it is the task of the educational system to dis- 
cover these persons and then to give them the necessary train- 
ing. The nation with such an educational system as this, 
together with a population of high natural ability, is not likely to 
be beaten in economic competition. By far the most valuable 
resource of a nation is its fund of human energy, which means 
its people. If this resource is rich to begin with, and if it is 
thoroughly developed by a sound and efficient educational sys- 
tem, the nation has the first and most important essential of 
greatness. Nations have grown rich and powerful in the midst 



1 62 PRINCIPLES OF NATIONAL ECONOMY 

of rather poor natural conditions, by reason of the fact that 
they have developed their human resources. Other nations have 
grown poor and weak in the midst of rich natural surroundings 
by reason of the fact that they have wasted or failed to develop 
the productive capabilities of their people. 

Land. Rich natural resources are, however, very important ; 
that is to say, a nation which develops its human resources 
properly can prosper more if it possesses a rich territory than 
if it possesses a poor territory. That is so obvious as to need 
very little discussion. It is very much like saying that though 
a good farmer may manage to prosper on rather poor land, 
nevertheless he would prosper more on good land. This brings 
us to the consideration of the other original and primary factor 
of production, namely, land. The productive power of land is 
not simply a matter of acres, any more than the productive 
power of labor is a matter of numbers. Quality is as important 
as area, though area is very important. Area is important in 
agriculture because it takes area to catch the sun's rays and the 
rainfall, without which plants cannot grow. It also requires 
area to give standing room to plants. But with all these advan- 
tages which go with area, if there be no soil or no plant food in 
the soil there can be no production. 

The productive power of the soil itself depends partly upon 
its physical and partly upon its chemical condition. A good 
physical condition depends upon freedom from stones and other 
obstructions which interfere with tillage and the use of ma- 
chines, a good subsoil which permits excess water to percolate 
downward in time of heavy rainfall and then to rise to the sur- 
face in times of drought, sufficient porosity to permit the roots 
of plants to penetrate easily, sufficient firmness to lend support 
to the plants^ and so on. A good chemical condition depends, 
first, upon the absence of injurious acids and alkalis in danger- 
ous quantities and, second, upon the presence of the elements 
of plant food in sufficient quantities and in proper proportions. 
Plants, like animals and human beings, need a balanced ration. 
There are many of these food elements, but those which are 



THE INTERRELATION OF THE FACTORS 163 

most likely to be absent or insufficient are nitrogen, phosphorus, 
and potassium. Generally speaking, any soil which possesses 
these three elements in the proper proportion may be said to be 
good soil, so far as plant food is concerned. The other neces- 
sary elements are so universally abundant as to furnish the 
average farmer no occasion for worry or even forethought. 
Only the hmiting factors of production are considered to be of 
any economic importance. Hence only those which are hkely 
to be scarce and to limit production are called economic factors. 

Mineral lands. Mineral lands differ so fundamentally from 
farm lands as to be almost in a class by themselves. While farm 
land is so widely distributed as to give almost every section of 
the earth's surface some opportunity for a profitable agricul- 
ture, and while no section can become fabulously rich in farm 
products, minerals are so localized as to leave large areas of 
habitable territory with practically no mineral resources what- 
ever, while very small districts are sometimes so rich as scarcely 
to furnish building space for the dwellings of the people who 
live by working the mines. Coal and iron are not only the most 
valuable, in the aggregate, of all the minerals but they have 
done more to give the peculiar character to our present ind\is- 
trial civilization than have any other two factors. This is 
sometimes called the Age of Steel ; but without coal to furnish 
a cheap and abundant fuel and without the rich beds of iron 
ore, some of which can be worked with a steam shovel, steel 
could not have become so abundant and such a dominant factor 
in this industrial age. 

Capital. Capital takes on such a multiplicity of forms as 
to make it impossible to describe it beyond saying that it is 
made up of all goods, except land, which are used to get an in- 
come. They are distinguished from things which are used 
directly for personal gratification. Thus, all tools and machin- 
ery, stores, factories, shops, barns, fences, and raw materials not 
yet worked up into consumable form are capital. Dwelling 
houses occupied by their owners, food in the larders of con- 
sumers, clothes which are in the closets as well as those 



1 64 PRINCIPLES OF NATIONAL ECONOMY 

actually being worn, books, pictures, household furniture, etc. 
are consumers' goods. The dividing line between producers' 
goods and consumers' goods is sometimes a rather dim and wa- 
vering one, but that need not disturb us much. The same may- 
be said regarding the line which separates the animal from the 
vegetable kingdom, and yet we are never puzzled as to which 
of the two kingdoms may claim any one of our common plants 
or animals. The physician's automobile may be at one time a 
tool of his profession and therefore capital, and at another 
time a pleasure vehicle and therefore a consumer's good. Many 
other objects may be so close to the dividing line as to puzzle 
us at times, but the great mass of the objects with which we 
are concerned is easily classified. 

Capital, like consumers' goods, conies into existence through 
the application of labor^ ingenuity, and forethought to natural 
objects. But there is one thing which enters into the pro- 
duction of a piece of capital which does not enter to the same 
degree into the production of a consumer's good ; that is, 
waiting, or abstinence. If you labor to make a tool for your 
own use you do not reap the reward of your labor until the tool 
ha^ been completed and has been used for a time in adding to 
your production. You have postponed your consumption. If 
you sell the tool to someone else you may at once spend the 
money you receive for it and avoid waiting. But the one who 
bought it of you now has to wait, since he has given up the 
opportunity to spend the money for consumers' goods and must 
now abstain until the tool begins to bring him in an income. 

When production exceeds consumption capital is increased. 
From the foregoing it will appear that the accumulation of 
capital depends in a very direct manner upon the character 
of the people. Unless the nation consumes less than it pro- 
duces, it is impossible that capital should increase at all. Even 
if accumulation should take the form of saving money, it 
would still be necessary for all the people to live on the con- 
sumers' goods produced by a part of them, in order that the 
rest of them might devote their time to the making of tools 



THE INTERRELATION OF THE FACTORS 165 

and other producers' goods. That would be necessary even 
in a communistic society. In our present economic system any 
individual who can live on less than his income may spend the 
balance of it on tools and other producers' goods. That which 
he spends for consumers' goods virtually hires men to produce 
that class of goods, while that which he spends for producers' 
goods virtually hires men to produce that class of goods. The 
more money there is spent for producers' goods, the more 
rapidly they will accumulate. This means that the more 
thrifty the people are, and the more inclined they are to live 
on less than their incomes and to spend the remainder for tools, 
the better equipped with tools they will be. 

We now see how definitely the prosperity, power, and great- 
ness of a nation depend upon the three factors — labor, land, and 
capital. A nation whose people are possessed of high ability 
(especially for those fields of work where ability is most 
needed), which has an abundance of rich land, and which 
accumulates capital rapidly so as to supply itself with the best 
of tools and other equipment has all that is needed on the 
physical side to make it prosperous. But much remains to be 
said in detail about each of these factors and the ways in which 
they are to be combined. 



CHAPTER X 

ECONOMIZING LABOR 
By the Division of Labor 

As suggested in Chapter IX, labor, land, and capital are the 
elements out of which national prosperity is built. Of these by 
far the most important, in the aggregate, is labor, since we 
include under that term both mental and physical exertion, the 
labor of management, of direction, and of investment as well as 
manual skill and muscular strength. It was also stated that the 
efficiency of labor depends upon two factors: the natural 
ability of the people and their training. But there are many 
things involved in training which are not taught in schools or 
learned in shops or business houses. The general attitude of 
mind of the whole people, their outlook on life, their personal 
habits, their systems of morals, and even their religion, all 
have their share in the efficiency of the people. The efficiency 
of labor depends also, to a large degree, upon its organization 
and the opportunity for specialization. 

Adam Smith begins his great ^^ Inquiry into the Nature and 
Causes of the Wealth of Nations" with a discussion of the 
division of labor. Other writers, both ancient and modern, 
had commented on the great fact of interdependence of 
individuals in society, but no one had gone into such detail or 
shown so clearly just why a minute division of labor was so 
advantageous. His statement of the case has scarcely been 
improved upon up to the present day, though many of his 
illustrations are out of date. 

Meaning of the division of labor. By a division of labor he 
means, first, a system under which no one produces everything 
he needs, but each one confines himself to the production of 

i66 



ECONOMIZING LABOR 167 

that one thing or those few things for the production of which 
he is best fitted, exchanging his surplus product for the surplus 
products of others who are specializing on other things ; second, 
the process of dividing the work involved in the making of 
a given article (each man performing a single part) and then 
assembling all the parts, thus producing a complete whole. He 
mentions the nail-makers of his day as illustrations of the first 
form. A common blacksmith, having many other kinds of work 
to do, could never become very skillful at nail-making, but one 
who did nothing else except to make nails became very skillful 
and could make in the course of a day several times as many as 
a common blacksmith. He mentions boys under twenty who 
had never learned any other trade and who could make, each of 
them, upwards of two thousand three hundred nails in a day ; 
whereas a common smith, even though he were accustomed to 
making nails occasionally, could seldom make over eight hun- 
dred or a thousand in a day. The second form of the division of 
labor was found in his day in the making of pins. The work of 
making a pin was divided into eighteen different operations, 
each operation being performed by a different workman. Of 
course neither nails nor pins are made nowadays as they were 
in his day, but the division of labor has been carried even 
farther. They are turned out by automatic machines, but the 
machines are made by one set of men, and the metal is mined, 
smelted, and prepared by different groups ; all are performing 
parts of the work of making nails or pins, as the case may be. 
Thousands of other illustrations may be found all about us if we 
choose to look for them. 

Advantages. Adam Smith names three distinct advantages 
which result from the division of labor : 

First, the improvement in the dexterity of the workman neces- 
sarily increases the quality of the work he can perform; and the 
division of labor, by reducing every man's business to some one 
simple operation, and by making this operation the sole employment 
of his life, necessarily increases very much the dexterity of the 
workman. . . . Secondly, the advantage which is gained by saving 



1 68 PRINCIPLES OF NATIONAL ECONOMY 

the time commonly lost in passing from one sort of work to another, 
is much greater than we should at first view be apt to imagine it. 
It is impossible to pass very quickly from one kind of work to 
another that is carried on in a different place and with quite different 
tools. . . . Thirdly and lastly, everybody must be sensible how 
much labor is facilitated and abridged by the application of proper 
machinery. It is unnecessary to give any example. • I shall only 
observe, therefore, that the invention of all those machines' by which 
labor is so much faciHtated and abridged, seems to have been 
originally owing to the division of labor. Men are much more likely 
to discover easier and readier methods of attaining any object, 
when the whole attention of their minds is directed towards that 
single object, than when it is dissipated among a great variety of 
things. But, in consequence of the division of labor, the whole of 
every man's attention comes naturally to be directed towards some 
one very simple object. It is naturally to be expected, therefore, that 
some one or other of those who are employed in each particular 
branch of labor should soon find out easier and readier methods of 
performing their own particular work, wherever the nature of it 
admits of such improvement. A great part of the machines made 
use of in those manufactures in which labor is most subdivided, 
were originally the inventions of common workmen.^ 

Adam Smith's opinion that the third and last of these advan- 
tages was of special importance has been fully justified by 
subsequent experience. Those special phases of the division of 
labor which he so aptly illustrated by the nail-makers and the 
pin-makers of his day scarcely exist now except in some minor 
industries. The nail-makers and pin-makers actually made 
their products with their own hands, using only such tools as 
could be handled and driven by their own muscles. Machines 
have now taken the place of the simple tools of that day. 
Sometimes these machines are directed and fed by attendant 
laborers, but sometimes they are so perfected as to require very 
little attention, feeding themselves automatically and stopping 
automatically when anything goes wrong. In these cases the 
work of the attendant is reduced to a minimum, consisting 

1 Wealth of Nations, chap. i. 



ECONOMIZING LABOR 169 

merely in starting the machines and putting them in order when 
anything goes wrong. 

There are penalties, however, to be paid for the extreme divi- 
sion of labor to which we have become accustomed. It is un- 
doubtedly efficient and economical — without it many articles 
which are now enjoyed by great masses of people v/ould be so 
scarce as to be available only for the very few — but it puts a 
great strain upon those who specialize. The ability to give 
close attention to one thing for a long time is not very widely 
distributed. Only the superior races possess it ; and even within 
these races there are many individuals who lack it, especially in 
their early youth. They easily become discontented and rest- 
less if required to work under conditions of extreme specializa- 
tion. They would be much better satisfied with more desultory 
work, even though such work accomplished less. This is one of 
the reasons why the quality of the population is such an impor- 
tant factor in national prosperity. A nation whose workers 
cannot stand specialized work will easily be left behind by a 
superior nation whose workers can. 

Differences between a tool and a machine. The difference 
between a tool and a machine is fairly clear. The working part 
of a tool is not only driven but guided by human muscles. A 
machine may be driven by human muscles, but the working 
part is guided by the machine itself. Besides, the power is not 
applied directly to the working parts, but indirectly through a 
series of mechanical devices such as wheels, pulleys, levers, 
cranks, etc. For example, the working parts of a sewing ma- 
chine are the needle and the bobbin. These are guided by the 
other parts of the machine, and the power is applied indirectly. 
It is, therefore, a machine, even though it is propelled by the 
muscles of the operator; on the other hand, the needle of 
the tailor or seamstress is not only propelled but guided by the 
worker. The hammer of the blacksmith is a tool ; a steam ham- 
mer is a machine, not so much because it is driven by steam as 
because the working part (that is, the hammer itself) is con- 
trolled, guided, and made to strike accurately by other parts 



I70 PRINCIPLES OF NATIONAL ECONOMY 

of the machine, and the power is appHed indirectly through 
mechanical devices. Even in the case of a riveting machine, 
while it has to be held in place, the actual blows are struck in 
rapid succession by a striking part which repeats the same 
motion over and over, being guided in its rapid motion by other 
parts which are made for that purpose. 

Advantages of machinery. The advantages of the machine 
over the tool are, first, that it makes possible the use of greater 
power than can be used to drive a tool ; second^ that it can be 
driven at much greater speed. Since the working part is guided 
accurately by the mechanism and made to repeat the same 
operations over and over, the only limit of the speed at which 
it can be driven is that fixed by the strength of the materials 
of which it is composed. A third advantage is that by reason of 
the power which may be used to drive it, and of the strength 
of the materials of which it is composed, it can perform opera- 
tions which no tool whose working part is guided and controlled 
by human muscles could perform. Perhaps it would be more 
accurate to say that it can be made to control working parts 
which are themselves too large and heavy to be guided by 
human muscles. The working part of a steel-rolling mill, for 
example, consists of the rollers. Obviously no human hand 
could guide such powerful instruments, to say nothing about 
driving them. They are held in place and controlled by a power- 
ful framework and, with the stupendous power which they have 
behind them, can perform gigantic feats. The fact that a ma- 
chine is capable only of repeating one operation over and over 
suggests a weakness. It can be successfully employed only 
where there are operations which have to be repeated a great 
many times. The fact that sewing involves the making of many 
stitches, all of them very much alike, makes it a suitable kind 
of work for a machine. The binding of sheaves of grain is an- 
other operation which has to be repeated a vast number of times 
in the harvesting of a crop ; therefore a twine binder is a practi- 
cal machine. Threshing the grain with a flail also required a 
constant repetition of the same act ; therefore it could be per- 



ECONOMIZING LABOR 171 

formed by a machine. In short, any operation which has to be 
repeated without variation a great number of times is suitable 
for machine work. 

Human ingenuity is now able to construct machines which 
can perform any operation, however delicate, which the human 
hand can perform. Anyone who has seen the wonderful machin- 
ery at work in a modern watch factory, for example, will not 
doubt this statement. But if it is an operation which does not 
have to be repeated continuously and a great number of times, 
it may not pay to build a machine for the purpose. It may be 
cheaper to do the work by hand. Even the darning of socks 
and the patching of trousers can be done by machinery ; but un- 
less it were done on such a large scale as to keep a darning- 
machine or a patching-machine busy a good part of the time it 
would be cheaper to darn and patch by hand. There are still 
a good many operations of this character, especially in the 
household and also in agriculture, the greatest of all our indus- 
tries. Much work must still be done by hand or with tools 
rather than with machines. 

Avoid competing with machines. By way of digression it may 
be pointed out that young people who are looking forward to 
an occupation should bear in mind that a machine can do any- 
thing which can be reduced to a routine, or a constant repetition 
of the same act, and that in the course of time all such work 
will probably be done by machines ; therefore any occupation 
requiring constant repetition ought to be avoided by everyone 
who is intelligent enough to be trained for anything else. No 
machine can think or use discretion ; therefore it will never be 
able to do any kind of mental work or any kind of physical 
work which requires judgment, discretion, taste, or tact. Those 
who do not wish to compete with machines will do well to train 
themselves to think, to use discretion, or to exercise taste or tact. 
One should do this as much in the interest of the nation as in 
the interest of oneself. The nation has no great need for men 
to do work which machines can do just as well. What it needs is 
men who can do what machines can never do. 



172 PRINCIPLES OF NATIONAL ECONOMY 

Two kinds of division of labor. As suggested above, the divi- 
sion of labor takes on a somewhat different character when 
highly developed machinery comes into general use. This may 
be explained further by pointing out two kinds of division. One 
has been called the contemporaneous division of labor and the 
other, the successive division of labor/ Under the contem- 
poraneous division of labor men are, at the same time, specializ- 
ing in different lines of production. One group is producing, let 
us say, breadstuffs and bread, another meat, another textile 
fabrics and clothes, and so on, each group bringing some kind 
of raw material through the various stages of production until it 
matures into a finished product ready for consumption. An- 
other phase of the contemporaneous division is found when dif- 
ferent men are, at the same time, producing different parts of 
the same product, the parts being assembled later into a finished 
whole. Lumbermen are cutting the timber which eventually 
goes into a house, while men in the ore beds are getting out the 
iron ore which eventually goes into the house in the form of 
nails, and still other workmen are making the brick or quarry- 
ing the stone which eventually will go into the foundations and 
the chimneys. 

Under the successive division of labor different sets of men 
are working on the same material, bringing it forward through 
the successive stages to maturity. Thus, following the choppers 
who fell the trees come the sawyers who saw them into rough 
boards, the carriers who transport the boards, the men in the 
planing mill who plane them, and so on, until the carpenters 
fit them into their places in the house. The iron ore goes 
through similar stages, as does every bit of material which 
enters into the final product. 

The lengthening of the process. This lengthening of the 
process of production, making it extend over a longer period 
of time, is one of the most striking characteristics of the era 
of machine production. It calls for more foresight, more plan- 
ning for the distant future, more expenditure of labor and in- 

1 See Taussig, Wages and Capital, p. 6. New York, 1898. 



ECONOMIZING LABOR 173 

vesting of capital long in advance of the consumption of goods, 
than were ever necessary or possible in any previous age. 
There is, therefore, under this regime, a greater demand than 
ever before for foresight, for thrift, for courageous investment, 
for the hazarding of large sums on the chance of gains in the 
distant future. There may be some connection between this 
fact and the fact that the large rewards, in our day, go to the 
men who exercise foresight^ who invest courageously and wisely, 
who hazard their time and wealth on enterprises which can bear 
fruit only at some distant day in the future ; but to do these 
things successfully and safely requires great wisdom. Some, 
however, lacking wisdom, may blunder into success ; but those 
who blunder are much more likely to blunder into failure. 

The contemporaneous division of labor has to do with space ; 
that is, it involves the doing of different kinds of work in dif- 
ferent places at the same time. This calls for the coordination 
of that labor and the exchange of products in order that each 
specialist or specialized group may get the advantage not only 
of its own efficiency but of that of other specialists and special- 
ized groups. Where different workers are, at the same time, 
but in different places, working on different parts of the same 
product, it is necessary that someone should coordinate the 
work. In a great automobile factory, for example, there are 
many different parts being produced simultaneously. In order 
that these parts may all be assembled and fitted together 
there must be very careful planning and organization. This 
is what is meant by the coordination of labor performed in 
different places. 

The time element. The successive division of labor has to 
do with time ; that is, it involves doing, at different times, by 
different men, different parts of the work of completing an 
article. In the same automobile factory the same piece of 
material is worked upon by many men in a regular order of 
succession. This calls for the coordination of labor performed 
at different times. The lengthening of the process of production 
in the whole of modern society makes this form of coordination 



174 PRINCIPLES OF NATIONAL ECONOMY 

peculiarly important. Its greatest importance, however, is 
found outside any individual factory. Before the automobile 
factory could be built there must have been much work done in 
procuring the raw materials for the building and the machines, 
in producing food and clothing for laborers, and in doing a 
multitude of other things. Similarly, before shoes can be made, 
cattle must be raised and slaughtered, and their hides tanned ; 
shoe factories must be erected and equipped with products from 
the mines and forests ; and a vast amount of preparation must 
be made in other ways. The labor of the herdsman must be 
coordinated with that of the clerk in the shoe store ; otherwise 
we should not have shoes as we now have them. Unless this 
coordination is brought about, the same man would have to kill 
the animal, skin it, tan the hide, and go through all the proc- 
esses necessary to the finishing of a pair of shoes. 

Territorial division of labor. In one of its broader aspects 
the contemporaneous division of labor is known as the terri- 
torial division of labor. This is what takes place when one re- 
gion produces that for which it is best fitted and exchanges its 
surplus for the surplus of other regions which also are special- 
izing on those products for which they are best fitted. Thus, 
our Middle-Western states of the upper Mississippi Valley pro- 
duce hay, grain, and live stock to supply bread, meat, and dairy 
products not only for themselves but for the rest of the coun- 
try as well, besides sending a great deal abroad. The South 
grows cotton enough to supply the greater part of the world. 
Both regions receive in exchange for these farm products the 
manufactured products of the Eastern states and foreign coun- 
tries, and the mineral products of the mountain states and the 
upper regions of the Great Lakes. 

It is the territorial division of labor which gives rise to the 
important business of transporting goods from one region to an- 
other. Obviously, if one region should -find it advantageous to 
produce everything needed or desired by its inhabitants, there 
would be no occasion for transporting goods into it. Similarly, 



ECONOMIZING LABOR 175 

if it did not produce a surplus of something or other which could 
be sold on an outside market, there would be no occasion for 
transporting goods outward. At the same time, the territorial 
division of labor is made possible by the transportation of goods 
and tends to grow in importance in proportion as transportation 
becomes cheaper and more efficient. A slight advantage in the 
exchange of products might easily be overcome by a heavy 
transportation cost. For example, even though New England 
cannot grow wheat so economically as Kansas or North Dakota 
can, yet if the cost of transporting it over the intervening dis- 
tance and of transporting manufactured products back to pay 
for it were very high, New England might find it advantageous 
to grow her own wheat, and the states which now produce it 
might find it advantageous to do their own manufacturing. 

The advantages of a territorial division of labor, where the 
transportation problem is solved^ are similar to those which 
result from a division of labor among individuals in the same 
neighborhood. If it is profitable for each individual to specialize 
upon the work for which he is best fitted, it is equally profitable 
for each neighborhood to specialize. In almost any neighbor- 
hood, however, there is some diversity of soil and natural re- 
sources, as well as a diversity of talents among the people. 
Therefore it will seldom happen that a whole neighborhood, 
much less a whole region of considerable size, can profitably 
specialize upon a single product. It is more likely that a whole 
neighborhood or region will find it profitable to specialize upon 
a number of products. Thus, New England, the South, and 
the Corn Belt each produces a considerable variety of products, 
but each also finds it advantageous to import a considerable 
variety of other products.. New England, for example, probably 
secures her bread and meat at less cost to herself by devoting 
most of her energy to manufacturing, and then exchanging her 
manufactured products for the wheat and beef of the West, than 
she would if she tried to grow these important food products on 
her own soil. Let us suppose that the labor of an average man 



176 PRINCIPLES OF NATIONAL ECONOMY 

will produce in a year eight hundred dollars' worth of goods in 
an average New England factory, but only six hundred dollars' 
worth of wheat on an average New England farm. Let us as- 
sume that it costs twenty-five dollars to ship his goods west and 
seventy-five dollars to ship the wheat east. Let us assume, 
further, that in the wheat-growing sections of the West the 
labor of an average man will produce a thousand dollars' worth 
of wheat and only eight hundred dollars' worth of goods in a 
factory. It can easily be figured, so long as the conditions re- 
main as we have assumed them to be, that the wheat section 
can get more manufactured products for its labor by grow- 
ing wheat than by manufacturing, and that New England 
can get more wheat for her labor by manufacturing than by 
growing wheat. 

International division of labor. When the territories consid- 
ered are not different sections of the same country but different 
countries, we have what is known as the international division 
of labor. Were it not for certain uneconomic factors which 
enter into the problems of national life and existence, everything 
which can be said in favor of a territorial division of labor and 
freedom of exchange within a country could also be said, and 
with equal force, in favor of an international division of labor. 
The chief of these uneconomic factors is the possibility of war. 
War is the greatest disturber of normal economic activities, and 
until it can be eliminated every nation must calculate with refer- 
ence to its possibility and be prepared for it. In case of war a 
nation which is not prepared to produce all the necessaries of 
life, as well as all military supplies, may find itself helpless be- 
fore a foreign enemy. Its only other hope would be to keep 
open the channels of commerce which connect it with outside 
sources of supply, but this is one of the things which the enemy 
country would try to prevent. Nitrates, for example, are, in 
the present state of science, necessary both for fertilizers and 
for explosives. A country which could neither produce its own 
nitrates nor manage to get a supply from abroad could not wage 
war for a very long time. 



ECONOMIZING LABOR 177 

In some animal societies, and especially in the colonies of 
certain insects such as bees and ants, there is an elaborate and 
admirable division of labor. Elaborate and admirable as it is, 
however, it is rudimentary as compared with that which is 
found in any highly developed industrial society. There are no 
such minute division of labor and extreme specialization as are 
found in a modern factory ; there is no such detailed planning 
for the distant future; there is no such bringing together of 
materials from distant places ; there is no such coordination of 
labor performed at such widely separated times and places ; 
there is no such system of exchange as we see carried on all 
about us in our own communities. If you will study the various 
material objects on your dinner table and find out all about 
each of them, you will find that literally thousands of people, 
few of whom you ever saw or heard of, and few of whom ever 
saw or heard of one another, have had a part in the preparation 
of your meal and the table, dishes, knives, forks, and spoons 
which you use. It is through the system which we have called 
the division of labor that you, by doing a very few useful things 
and doing them well, find a considerable variety of objects on 
your table at the proper time without your having given much 
thought to any one of them. 

No preconceived plan. This is sometimes called the organiza- 
tion of industry. The term ''organization" may be a little 
misleading, though not necessarily so. It seems to imply that 
somebody thought it all out or planned it and then organized 
the system. It did not come about in that way. The process was 
more like the slow growth of an organism. Each individual 
looked about for something to do in order to earn a living and 
took what looked to him at the time like the most available 
opportunity. Wherever there was a scarcity of workers there 
was an opportunity for a new worker. Wherever there was an 
oversupply the opportunity did not look so good. By that sim- 
ple process in which each individual chose to do that which 
he could do to his own greatest advantage the whole elaborate 
system was worked out. 



178 PRINCIPLES OF NATIONAL ECONOMY 

Adam Smith's remarks, quoted earlier in this chapter, regard- 
ing the way in which the minute division of labor has aided in 
the invention and improvement of machinery', may be applied 
to the much greater problem of the development and improve- 
ment of a great and complex industrial system. When each 
workman spends all his time performing a single operation, it 
is much easier for him to devise a better way of doing it than 
it would be if he had to give his attention to many things. It is 
probable that no important and complicated machine was ever 
invented and made to work successfully without a great deal of 
trying out, modification, and general improvement. In actual 
use many weaknesses in the machine are revealed which no in- 
ventor, however wise, could have foreseen and prevented. What 
is sometimes called the heroic theory of invention does not actu- 
ally work in practice. By the heroic theory is meant the theory 
that a great invention springs, a completed whole, from the 
mind of the inventor, as Athena sprang full-armed from the 
head of Zeus. The fact seem to be that no human mind is 
capable of inventing a complete and successful machine without 
many trials, failures, modifications, and detailed and piecemeal 
improvements. Even such a simple device as a bicycle passed 
through a long and interesting evolution before it reached a 
stage which made it generally useful and popular. The automo- 
bile is another illustration of gradual and detailed improvement 
after it was actually in use. 

If it is impossible for any human intelligence to invent and 
construct at once a satisfactory automobile, it would have been 
obviously impossible to invent and organize a whole indus- 
trial system; that would present an infinitely more difficult 
problem than the invention and construction of any machine 
that was ever built. It has been by age-long trial and error, 
variation and selection, experiment and failure, that even a 
tolerably successful industrial system has been worked out. 
There are doubtless endless improvements yet to be made, but 
they certainly will be made by the same process of gradual and 
piecemeal adjustment. Anyone who thinks that he can devise 



ECONOMIZING LABOR 1 79 

and organize a better system than the present shows, by the 
very fact that he thinks so, that he is unfitted for the task. He 
shows that he lacks the first element in fitness ; namely, a 
knowledge of the vastness of the problem and the infinite num- 
ber of difficulties to be overcome. It is different, however, with 
one who thinks of some detail in the present industrial system 
which might be improved. This presents a problem worthy of 
the greatest minds, and it also furnishes a possibility of genuine 
achievement. 



CHAPTER XI 

ECONOMIZING LABOR (Continued) 
By the Use of Power 

Power needed for moving material objects. It has been pointed 
out in Chapter IX that man's work, on the physical side at 
least, consists in moving material objects. For this work the 
first essential is power. The power first applied was, of course, 
that which was generated in his own body and exercised through 
his own muscles. But the secret of the industrial success of 
modern civilized nations lies in their command of other sources 
of power rather than in any superior muscularity of their own. 

Animal power. The first of these other sources of power 
which man utilized on a large scale was that of animals which 
he domesticated and enslaved. They are still one of the most 
important sources, if not the most important source, of power. 
There were on the farms of the United States in 1920 about 
26,000,000 horses and mules, to say nothing of those in use in the 
cities and towns. If we add those not on farms it brings the 
number nearly to 30,000,000. It is not easy to compare the 
actual working power of a horse with that of the horse-power 
unit as used in measuring the power of a steam engine ; but, 
assuming that they are equal, it would appear that the total 
animal power in use in the United States was, until recently, 
very nearly as great as the total steam and water power used 
in manufacturing. 

Among the animals which have furnished power for man's 
work may be named the horse, the mule, the ass, the ox, the 
buffalo, the camel, the elephant, the reindeer, the llama, the 
dog, and the goat. Of these the most important for the north- 
temperate zone is the horse, though the ox is a close second. 

180 



ECONOMIZING LABOR i8i 

Originally, in fact until very modern times, the horse was used 
mainly to carry man himself or loads of material on his back 
rather than for traction ; that is, for pulling or drawing loads. 
Such traction as he was required to perform was the drawing of 
war chariots and carriages of state and, later, of carriages and 
vehicles for the conveyance of travelers. His speed fitted him 
especially for this work. For the slower and heavier work of 
plowing, harrowing, and drawing heavy loads of farm produce 
the ox was long considered superior. In the first place, he was 
larger and heavier than the horses of that day. His heavy body 
and short legs and his general anatomy seemed to fit him pecu- 
liarly for pulling. He fights by pushing with his head. This 
seemed to call into play the same muscles, bones, and joints as 
are used in pushing on the yoke. During the last century or so 
the horse and the mule have been gradually displacing the ox 
even in agriculture. 

Displacement of the ox by the horse. Two factors have con- 
tributed to this change from the ox to the horse and the mule as 
a source of power for farm work. One is the development of 
large and heavy breeds of horses of such strength and docility 
as to fit them as well as oxen for the pulling of heavy loads. 
The other is the development of farm machinery. All large 
breeds of horses, however, have been developed in the north- 
western parts of Europe ; that is, in Great Britain, northern 
France, Belgium, Holland, and Denmark. Whether this is due 
to something in the soil or climate or simply to the ability of 
the people of those countries as animal breeders it is impossible 
to say. Russia and Hungary also are horse-breeding countries 
and use horses to a certain extent for traction purposes, but 
they have not produced such huge draft horses as the other 
countries mentioned. The United States also is breeding large 
numbers of heavy draft horses, but we have imported our breed- 
ing stock from Great Britain, France, and Belgium. We sur- 
pass all other countries, however, in the number, quality, and 
speed of our trotting horses. The lighter breeds of horses not 
only lack the weight necessary for drawing heavy loads but 



1 82 PRINCIPLES OF NATIONAL ECONOMY 

they are also likely to be too nervous and excitable. The 
United States and Canada, together with the countries which 
originated the heavy breeds, have pretty generally substituted 
the horse and the mule for the ox even in farm work. 

The mule. Southern Europe and the southern part of the 
United States have made large use of the mule. This hybrid, 
combining something of the patience and endurance of the ass 
with the size and strength of the horse, is admirably adapted 
to farm work in climates where the huge draft horses of the 
North suffer from the heat and where the lighter horses of the 
South are too nervous and excitable for the slow, heavy work on 
the farm. Even the ass has played a humble though use- 
ful role by furnishing power to those who could not afford a 
more expensive animal, such as a horse or a mule. 

Both the horse and the mule — even the huge draft breeds — 
have one great advantage over the ox ; that is, their more rapid 
gait. While they cannot trot as well as the lighter breeds of 
horses, they can trot very much better than the ox and they 
can walk much faster ; and in farm work it is this faster walk 
which counts. 

The factor which has had a great deal to do with the sub- 
stitution of the horse and the mule for the ox is the increased 
use of agricultural machinery. This has required power of a 
superior kind, and the horse has proved to be much better 
adapted than the ox to the drawing and handling of machinery. 
This is mainly because of his more rapid gait. When the 
farmer has his money invested in expensive machinery it is 
important that he get as much work out of it as possible. He 
can scarcely afford to allow it to run so slowly as would be 
necessary if it were drawn by oxen. 

Farm machinery. Still another factor which has contributed 
to this end is the higher wages for farm labor in the countries 
of northwestern Europe, Canada, and the United States. If a 
farmer were hiring labor at a very low wage, it would not be 
so important that he get the greatest possible amount of work 
out of his hired man. But when labor is expensive the effect is 



ECONOMIZING LABOR 183 

very much the same as when tools and machinery are expensive. 
It is thus important that as much as possible shall be accom- 
plished by each laborer. It is therefore better to give him a 
fast-walking team than a slow-walking team. 

Historical importance of the ox. The ox, however, from the 
most ancient times until quite recently, has been the chief if 
not the sole draft animal of all the races that have used draft 
animals at all. His docility and patience, his great strength, 
the cheapness of his harness, and his ability to find his own 
living when not at work contributed to make him a most valu- 
able assistant to man in his struggle for the conquest of the 
earth. In the pulling of the heavy wooden plows and harrows 
that were in use before the modern steel tools were invented, 
and the lumbering carts that were in use before modern 
vehicles were constructed, he enabled men to cultivate the soil 
on a vastly more extensive scale than would have been possible 
by human muscles alone. He thus contributed to the production 
of food for increasing populations of men, and in the end he 
contributed his own body to help feed them, and his own hide 
in order that they might be shod. In many parts of the world 
he is still the principal draft animal for farm work. In 
southern Europe, southern Asia, and parts of South America 
one may still see magnificent teams of oxen at work in the 
fields and drawing carts along the highways. They move with 
a steadiness and massiveness which give the impression of irre- 
sistible power ; but they are too slow for most of our hustling 
Americans, though a good many oxen are used in the rough lands 
of New England. If we take the whole history of man's use of 
power, it is probable that the ox has furnished more in the 
aggregate than any other agency, not excluding coal and steam. 

Tropical animals. The Asiatic elephant and the camel are 
admirably fitted for tropical and subtropical countries, the 
former in moist and the latter in dry climates. The African 
elephant has never been domesticated, either because of his 
fierce and intractable disposition or because the natives of 
Africa did not care to domesticate him. It is a remarkable fact 



1 84 PRINCIPLES OF NATIONAL ECONOMY 

that the native African races never domesticate any animal, — 
not even the zebra, which appears capable of domestication. 
However, no other race has reduced any animal to domestica- 
tion since prehistoric times. Either prehistoric man was our 
superior in this art or else we have not sufficiently felt the need 
of any more animals. The prodigious strength and the remark- 
able intelligence of the elephant fit him for a variety of opera- 
tions besides pulling loads. He requires considerable quantities 
of coarse fodder such as grows abundantly in warm and moist 
countries. The great advantage of the camel in dry countries 
is, of course, his well-known ability to work for long periods 
without water. He is used in parts of southwestern Asia and 
northern Africa. The water buffalo possesses qualities almost 
the opposite of the camel; that is to say, he can work only 
where water is abundant and easily accessible not only for 
drinking but for frequent bathing or wetting of the skin. He 
is a powerful animal and well adapted to working in muddy 
lands and irrigated rice fields. 

In polar regions, where vegetation is scarce, the problem of 
animal power is a more difficult one. Where moss and lichens 
abound, the reindeer is a valuable source of power. In the high 
mountain regions of Peru the llama is used for carrying loads 
but not for traction. Where forage is not found in sufficient 
abundance, but where meat and fish can be provided, some 
carnivorous animal has to be used. The dog is the only one 
which is sufficiently well domesticated to serve the purpose. 

Solar energy. The great physical source of power, so far as 
man has been able to develop it, is understood to be the sun. 
The amount of solar energy which comes to the earth in the 
form of light and heat is so stupendous as to bewilder the im- 
agination. Its most important service is in the promotion of 
plant growth and, through plants, of animal growth ; but it is 
also transformed into mechanical power in a number of ways. 

In the first place, it vaporizes water. Since the air is heavier 
than water vapor the latter rises, or, more literally, the air falls 
through gravitation. When this water vapor reaches high alti- 



ECONOMIZING LABOR 185 

tudes and is congealed, it becomes heavier than air and falls 
through gravitation in the form of rain, snow, etc. A small 
fraction of it falls on mountains and other high portions of the 
earth's surface. Gravitation still pulls it downward through 
the streams. These are harnessed and made to turn water 
wheels, thus furnishing mechanical power to do man's work ; 
that is, to move pieces of matter. 

In the second place, through plant growth combustible ma- 
terial is stored up in the bodies of trees and other plants. When 
this material is burned, heat is developed which may be used 
to vaporize water. In the form of vapor the water expands and 
may be made to push a piston, which is, again, a usable form 
of mechanical power for the moving of other bodies. The accu- 
mulation and covering over of vast masses of combustible 
vegetable material in previous geological periods gave us our 
coal beds, which have recently become a principal source of 
both artificial heat and mechanical power. It is generally sup- 
posed that petroleum is of animal origin. If so, it is, like coal, 
the product of solar energy. It may be used, like coal, to 
transform water into steam. The internal-combustion engine 
is a later development and is, in many ways, a superior method 
of transforming combustion into mechanical power. 

In the third place, the direct rays of the sun may be so con- 
centrated as to produce an intense heat, which may, in turn, 
be used to transform water into steam. According to tradition 
the great mathematician Archimedes burned the Roman ships, 
which were besieging his native city of Syracuse, by the use of 
a large number of mirrors. By reflecting the sun's rays from 
all these mirrors upon a single spot, so much heat was concen- 
trated as to set the ships on fire, one after another. Whether 
there is any foundation of fact for this story or not, there is 
no doubt as to the possibility of producing an intense heat by 
the concentration of the rays of the sun. Anyone can demon- 
strate this with a common burning-glass. Solar engines have 
already been constructed which make use of converging mirrors 
for the concentration of the sun's rays. This produces an 



1 86 PRINCIPLES OF NATIONAL ECONOMY 

intense heat which, in turn, converts water into steam and 
moves a piston. 

Winds. In the next place, if we may assume that winds are 
in general caused by variations in temperature they may be 
said to be derived from solar energy. This mechanical power, 
as used for the moving of boats, has been of the very greatest 
importance in the development of commerce and the spread of 
civilization. The epoch-making voyages of Columbus, as well 
as the voyages of great numbers of men less noteworthy than he, 
were made possible by the ingenuity with which man had learned 
to utilize this vast source of power. For certain kinds of sta- 
tionary work which does not have to be performed regularly, 
such as pumping water, grinding grain, etc., the windmill has 
proved an economical device for utihzing the power of the winds. 

Tides, Another source of power of which some use has been 
made is the tide. This can be traced to the momentum of the 
earth rather than to solar energy. The rising and the falling 
of the tides, especially along coasts with many inlets and 
estuaries, have created opportunities for tide mills, which can 
be made to do certain kinds of work. 

With all these sources of power, and possibly others which 
may be developed, there is no likelihood that our ingenious 
race will ever be compelled to fall back upon its own muscles 
or even to depend exclusively upon animal power. In that 
distant day when our coal beds and oil fields are exhausted, the 
sun's rays will still continue to strike the earth. That being the 
case, trees and other plants will still grow, though wood could 
scarcely take the place of coal and petroleum. Alcohol can 
scarcely become as cheap as gasoline has been in the past, but 
it can be manufactured in considerable quantities from a variety 
of plants. Again, the rains and the snows will continue to feed 
our rivers and turn our waterwheels. Electrical transmission 
will enable us to utilize many streams now running idly to the 
sea and to distribute the power over wide areas and send it a 
long distance from the streams. Solar engines may be so per- 
fected as to enable us to utilize the inconceivable and inexhaust- 



ECONOMIZING LABOR 187 

ible flow of energy which comes to us in the form of direct rays 
from the sun. The winds will continue to blow and push our 
sails and turn our windmills. And so long as the earth continues 
to revolve about its axis, the tides will continue to ebb and flow, 
and these may furnish us considerable quantities of power. 

Even if it should happen that none of these sources nor all 
iDf them combined should furnish power quite so cheap as that 
which we now enjoy through the use of coal, still we may be- 
come so well to do, through improved agriculture, improved 
technical processes for utilizing power, and more rational habits 
of living, as to enable us to bear the extra cost of these other 
kinds of power with no great inconvenience. Even if this 
should not happen, it must not be forgotten that a considerable 
number of civilizations have been built up and multitudes of 
people have lived, comfortably and happily with no power ex- 
cept that of their own muscles, their domestic animals, the 
winds, and the waterfalls. 

The steam engine. Next to the yoking of the ox at some time 
in the prehistoric past, the most momentous event in the history 
of man's power was the invention of the steam engine. The 
reason why this was so momentous was that the coal beds of 
the north-temperate zone furnish a vast quantity of very cheap 
and very concentrated fuel. It is difficult to see how the heat 
of burning coal could have been transformed into mechanical 
power in any other economical way. The great cheapness and 
economy of this source of power is what has made it such a 
powerful factor in the development of modern industry. By 
merely vaporizing water in a boiler by means of this cheap fuel, 
enormous pressure can be exerted. This pressure can be made 
to move a piston. From this point on, further developments 
are merely the results of mechanical adjustments. Whenever 
one object, such as a piston, can be made to move as we want it 
to move, other objects can be hitched to it and be made to move 
also. The first of these mechanical adjustments to produce 
great results was that by which the moving piston was made to 
turn a wheel, thus converting linear motion into circular motion. 



i88 



PRINCIPLES OF NATIONAL ECONOMY 



After that adjustment was made, every form of steam-driven 
machinery became a mechanical possibiHty. 

Time does not permit us to mention all even of the really 
important adjustments which have been made for the greater 
utilization of the pressure of steam on a movable piston. The 
economical conversion of mechanical power into electricity and 
of electricity back into mechanical power has enabled us ten 
utilize power in a variety of ways which formerly were im- 
practical, besides giving rise to an electrical industry of vast 
-proportions. The internal-combustion engine has made pos- 
sible automobiles and flying machines. 

Roads. The subject of roads and tracks would furnish an 
interesting study to supplement a study of power. The better 
the track, of course, the less power it requires to move an ob- 
ject. This would include everything from the air and the ocean, 
railway tracks, paved streets, and dirt roads down to the lubri- 
cated grooves, cylinders, and sockets through which the parts 
of a machine are made to move. Roads, streets, and railway 
tracks will be discussed under the head of transportation. The 
rest must be left to the imagination of the student. 

f Human 

Horses 

Mules 
Asses 
Oxen 
Reindeer 
. Animal i Buffaloes 
Yaks 

Elephants 
Power-! Camels 

Llamas 
L Dogs 
rWind 

r Streams 
Water -^ Waves 
Mechanical -' [ Tides 

p. , J Steam engines 

1 Internal-combustion engines 
. Solar engines 



Muscular -{ 



CHAPTER XII 

ECONOMIZING LABOR (Concluded) 
By the Use of Capital 

What is capital ? Capital has come to play a very important 
part in modern industry. This increase in importance has 
been so great as to lead to the impression that capital has come 
into existence only in recent times. That which is essentially 
capital has been in existence as long as tools have been in ex- 
istence, but it has taken on a new and very distinct importance 
since the rise of machine production. 

As a factor in the modern economic system, capital may be 
defined as wealth, other than land, which is used by its owner 
to secure an income rather than for direct enjoyment. Land 
and other natural agents are usually treated as though they 
were in a class by themselves and are carefully distinguished 
from the products of human industry and enterprise. These 
products of industry and enterprise are again subdivided, ac- 
cording to the uses to which they are put, into producers' goods 
and consumers' goods. Producers' goods include all tools, ma- 
chines, buildings, appliances, and other forms of equipment 

r Land 

Wealth < , 

^ , r Producers' goods 1% v i 

IProductsJ "^ ... .A 1- J. *u ^Capital 

1 ^ 1 J I Let, rented, or hired to others J 

t Consumers goods < 

I Used or consumed by their owners 

which are used for the production of other goods ; while con- 
sumers' goods, on the other hand, include only such goods as 
are used for direct enjoyment rather than for the purpose of 
producing other goods. Capital includes all producers' goods 
and some consumers' goods. It includes all producers' goods 

189 



190 PRINCIPLES OF NATIONAL ECONOMY 

because they are used for the purpose of increasing the owner's 
income. It also includes some consumers' goods because some 
of these are used by their owners for the purpose of securing 
an income. A pleasure automobile, for example, which is let for 
hire is a consumers' good from the standpoint of society ; that 
is, it is not used to produce other goods but is used for direct 
enjoyment and satisfaction. From the standpoint of its owner, 
however, it is used to get an income. He gets no consumers' 
satisfaction out of it, but he gets paid for its use, and this pay- 
ment is a part of his income. In short, he keeps it for the 
sake of the income which it brings him. A dwelling house is 
likewise a consumers' good from the standpoint of society, but 
if it is rented, it is capital to its owner. He gets no direct satis- 
faction out of it. He gets money for its use. This money is a 
part of his income. 

Social capital and private income. Some writers have accord- 
ingly spoken of two kinds of capital : first, social, or productive, 
capital ; and, second, private, or acquisitive, capital. Social, or 
productive, capital is identical with producers' goods ; private, 
or acquisitive, capital includes such consumers' goods as are 
let, rented, or hired by their owners to other people. Consum- 
ers' goods, of course, are just as useful as producers' goods, but 
they are used for different purposes. Therefore private, or ac- 
quisitive, capital is just as useful as social, or productive, cap- 
ital. The owner is just as well entitled to his income in one 
case as in the other. Capital, then, is goods, but it is that 
portion of the produced goods in the possession of society which 
is used by its owners for the purpose of securing income rather 
than for the purpose of direct enjoyment. It is used by its 
possessors, however, as distinct from its owners, either for the 
production of other goods or for direct enjoyment. The posses- 
sor of a rented shop is using the shop for productive purposes ; 
the possessor of a rented dwelling house is using it for purposes 
of direct enjoyment. 

Capital a class of goods, not a fund of value. Capital is some- 
times conceived of not as a class of goods but as a fund of value. 



ECONOMIZING LABOR 191 

There are two reasons which lead naturally to this form of 
statement, but there is danger that this way of thinking may 
lead us into serious error. In the first place, however capital 
may have originated historically, one nowadays usually comes 
into possession of it first in the form of money; that is, the 
owner of the automobile, the dwelhng house, the shop, the fac- 
tory, usually spent money in order to get it. The possession of 
money gives one the opportunity to come into possession of 
these other forms of capital. The purchase of these various 
forms of capital is usually called investing capital. After one 
has purchased a shop or a factory, a house which one intends 
to rent to someone else, or any other income-bearing property 
one is said to have invested his capital. That sounds as though 
the money were the capital which one had invested. That is 
not strictly true. One has merely exchanged one form of cap- 
ital for another. 

Money one form, but only one form, of social capital. The last 
statement implies that money is a form of capital. This has 
sometimes been disputed. To be sure, money is not the only 
form of capital, but it is one form. While it is not correct to 
say that capital is money, it is correct to say that money is 
capital. A work horse is likewise a form of capital, but it is not 
proper to say that capital is a work horse. There is this differ- 
ence, however, between money and work horses. Very few 
capitalists ever find that the greater part of their capital is in 
the form of work horses. Almost every capitalist nowadays 
finds, at one time or another, that a large part of his capital is 
in the form of money or has passed through that form. He is 
continually buying and selling, receiving money and paying out 
money, and is not receiving work horses and paying out work 
horses. 

Money may be said to be a tool or a means by which the 
community can do more work than it would be able to do with- 
out it. It is, therefore, like other tools, a form of capital. 
It is also a very important form of capital, one which is con- 
tinually coming into the possession of every capitalist and be- 



192 PRINCIPLES OF NATIONAL ECONOMY 

ing paid out again. This leads naturally, as suggested above, 
to the inference that capital consists of a fund of value, or of 
value expressed in terms of money. While there is no objec- 
tion to continuing to speak of investing capital when one is only 
exchanging money for other forms of capital, still one must be 
on one's guard against assuming that capital is anything else 
than goods. It is well to remember also that stocks, bonds, 
mortgages, etc. are not capital, but only evidences of ownership 
of capital. The shares of the stock of a railroad company, for 
example, are not themselves capital ; they are only evidences of 
ownership in the railroad itself, which is the real capital. 

Another reason which leads naturally to thinking of capital' 
as a fund of value is found in the fact that capital, like all 
wealth, is measured in terms of value and its quantities ex- 
pressed in terms of money. There is no good way of saying 
how much capital there is in any community or in the posses- 
sion of any individual except by saying it in terms of money. 
If any capitalist were asked how much capital he possessed, and 
he were to answer in terms of tons, or cubic feet, or yards, or 
any other unit of physical measurement, he would not convey 
any clear or definite idea. Therefore, if you ask any business 
man to state how much capital he uses in his business he can 
answer you intelligently only by saying so many dollars or so 
many dollars' worth. This is a mere quantitative expression. 
If, however, you were to ask him in what his capital really con- 
sists he could answer you intelligently only by giving you an 
inventory of the various goods which make up his fund of 
capital. The only exception to this case would be the money 
lender, whose capital consists solely of money. 

Pure capital and capital goods ; pure weight and weighty 
objects. One may, however, rejei:t the idea that capital is 
money and still persist in the idea that it is a fund of value. 
The distinction has sometimes been made between pure capital 
and capital goods, pure capital being a fund of value embodied 
in the goods, and capital goods being the things themselves in 
which that fund of value is embodied. The value of the goods 



ECONOMIZING LABOR 



193 



is not capital any more than the weight of an object is the 
object itself. As stated above, value is the attribute which 
we use in trying to arrive at a quantitative conception of the 
real goods. It is the only attribute which they all possess in 
common and which at the same time indicates their ability to 
serve the owner's needs. The value, however, is only a symptom 
of that ability and not a cause of that ability. 

The function of productive capital is to aid in production. 
Except in the case of money it is not the value of the goods 
which enables them to do their work. The value is only a 
symptom of the fact that they are doing that work. A pro- 
ducers' good which ceased to aid in production would lose its 
value ; a producers' good which continued to be a real aid in 
production would retain its value. The value would be the 
shadow of the real thing and not the substance. Land also has 
value if it is productive. But it is not the value which makes 
it productive ; it is its productivity which makes it valuable. 
In this respect capital and land are similar. In the case of that 
special kind of capital known as money, and in this case alone, 
its usefulness, its ability to function, depends upon value ; in 
every other case its value depends upon its usefulness or its 
ability to function. 

Capital the result of working and waiting. The next ques- 
tion to arise is. How does capital come into existence? If it 
consists of tools, buildings, machines, equipment, etc., it is 
rather obvious that they come into existence because labor is 
expended in producing them. But this does not tell the whole 
story. In order that any community may come into possession 
of a larger stock of tools and equipment, it must, temporarily 
at any rate, divert its labor force from the production of con- 
sumers' goods into the production of these producers' goods. 
Whether it be a communistic society or an individualistic so- 
ciety this physical fact remains the same. In a communistic 
society, if the stock of capital goods is to be increased, some 
labor must be put to work making tools, machines, buildings, 
equipment, etc., and just that much less labor will be available 



194 PRINCIPLES OF NATIONAL ECONOMY 

during that time for the production of consumers' goods. Dur- 
ing this period the community as a whole will have fewer con- 
sumers' goods than it otherwise might have had. Of course 
the expectation is that the tools and equipment, after they are 
produced and put to use, will add to the total production. 
This, however, involves a certain amount of postponement of 
consumption. The community as a whole decides that it will 
have fewer consumers' goods in the present or immediate future 
in order that it may have more in the distant future. There is 
no possibility of evading this physical necessity. 

In an individualistic society, however, though the same 
physical necessity exists, the process is slightly different. Any 
individual may decide that he will consume a little less in order 
that he may have a little more to consume in the distant future. 
The way he does this is to save and invest, or else to turn aside, 
as may have been done in very simple states of society, from 
the work of gathering consumers' goods in order to apply him- 
self to the work of making tools. 

Making tools rather than consumers* goods. A primitive 
fisherman has frequently been used as an illustration of this 
simple process. He has been in the habit of catching fish 
with very simple tackle, but he sees an opportunity of increas- 
ing his catch if only he can get some kind of boat, so he decides 
to spend a part of the time each day in making one. By this 
combination of frugality and industry he eventually comes 
into possession of a boat which thereafter adds to his income 
and more than compensates him for the frugality which he 
practiced during the period in which the boat was building. 
This case is doubtless real enough to serve as an illustration of 
the essential process of increasing the stock of capital. 

It has not been many generations since farmers used very 
crude and simple implements, some of which they could make 
for themselves. The farmer who made his own plow was de- 
priving himself of the opportunity for amusement, which is a 
kind of consumption, or was reducing somewhat his consump- 



ECONOMIZING LABOR 195 

tion of material goods during the period when the plow was 
being made. After it was finished it assisted him in producing 
subsistence and added to his income available for consumption. 
This is in all essential particulars similar to the case of the 
primitive fisherman. A little later, however, the farmer, in- 
stead of making his own plow, hired a blacksmith to make it, 
paying the blacksmith money for his work. Here we have the 
same combination of labor and frugality as in the other cases, 
the difference being that in the making of the plow the black- 
smith does the laboring and the farmer exercises the frugality. 
With the money which he paid for the plow he could have 
bought consumers' goods and had immediate enjoyment. He 
postponed that enjoyment when he paid the money to the 
blacksmith and received the plow. In the then distant future, 
however, the plow added to his income and enabled him to 
make up for the loss of opportunity for immediate consump- 
tion, thus compensating him for the postponement which he 
underwent when he purchased the plow. 

The modern farmer, however, instead of hiring the black- 
smith to make the plow, usually buys his plow ready-made. So 
far as he is concerned the act of frugality is the same as though 
he deliberately hired the blacksmith to make it. He surrenders 
a certain amount of ready cash with which he might have 
bought consumers' goods ; he receives the plow, which for a 
period of years will add to his income and therefore compensate 
him. In the making of the plow, however, there were other 
tools used, as well as labor. Those other tools had been made 
in much the same way as the plow. Someone had invested 
money in them and then hired other labor to use those tools in 
the making of the plow. It has become, therefore, a very com- 
plicated process, but anyone who will analyze the process will 
find always the same two factors involved; namely, waiting 
and working, — postponement of consumption, on the one hand, 
labor, on the other. No capital can ever come into existence 
without this combination. It is merely obscured by the in- 



196 PRINCIPLES OF NATIONAL ECONOMY 

tricacies of the modern industrial process, and it requires a 
little more intelligence and study to see clearly where and how 
the frugality and the labor are combined. 

Separation of the functions of working and waiting. In the 
highly complicated industrial system of the present, with its 
increase of specialization, the two functions of waiting and 
working are generally performed by different persons or classes 
of persons. This has given rise to some of the most intricate 
and most difficult of our social problems. 

The small farmer, for example, who owns his own land and 
his own teams and farming outfit and who does his own work 
combines both functions. When he bought his team and outfit 
out of his own savings, he had to give up, for the present, the 
means of buying consumers' goods. That is, he had to wait for 
his consumers' enjoyment until the outfit should begin to earn 
him something. If, however, he hires someone to do his work, 
there is a separation of functions. 

In a simpler state, in which the same individual exercised 
both functions, no social or class antagonisms were developed. 
Even in the intermediate stage, when the farmer bought his 
plow from the blacksmith and then used it himself, we find 
both functions performed by the same individuals. Class antag- 
onisms could hardly develop under these conditions. But when, 
as in the modern industrial system, the capitalist (especially if 
he be a large capitalist) lives mainly on the interest of capital, 
while his helpers live mainly on the wages of labor (in other 
words, when the two functions are sharply separated), class 
feeling and class antagonism develop. It has come about in our 
urban industries that the average person who performs manual 
labor receives his wages in weekly installments and spends them 
mainly for consumers' goods, whereas the very tools with which 
he works are owned by other men who have specialized in 
the function of investing their money in capital; that is, in 
tools and equipment. 

Separation of the functions of the laborer and the capitalist. 
Capital has existed, of course, as long as tools and equipment 



ECONOMIZING LABOR 197 

have existed, but this separation of the two functions — that of 
the laborer and that of the capitalist — has become general only 
since the rise of machine production. Before that time the 
function of the capitalist was not important enough to create 
an opportunity for many men to live exclusively by the per- 
formance of this function. Not enough capital was needed in 
the primitive forms of industry which preceded the present to 
enable a large number of men to live on its earnings. It is this 
fact which is probably meant when it is erroneously stated that 
capital in the modern sense came into existence with the rise of 
machinery. Capital in the modern sense does not differ from 
capital in the former or capital in the ancient sense ; it differs 
only in the sense that there is more of it and that it is more 
needed. This combination of facts — the fact that there is more 
needed than ever before and that there is more of it supplied 
than ever before — has created what we call the capitalist class 
in modern industry, and that is a matter of the very greatest 
importance. 

Coordinating labor which is performed at different times. 
In a somewhat special but very important sense we may say 
that the function of capital is to aid in production by coordinat- 
ing labor which is performed at different times. In the chapter 
on The Division of Labor it was pointed out that there are 
two distinct forms of the division of labor ; namely, the con- 
temporaneous and the successive. Under our modern indus- 
trial system the successive division of labor has been greatly 
lengthened. In some cases many years elapse between the be- 
ginning of a process and the completion of the production of a 
consumable article, as when mines are opened, ore is smelted, 
factories are built and equipped, long before we can begin to en- 
joy the products of the factories. There is a striking analogy 
between the lengthening out of the successive division of labor 
and the widening out of the contemporaneous division of labor. 
The latter has been brought about through improved means of 
communication and transportation. It is literally true at the 
present time that thousands of miles or even half the earth's 



198 PRINCIPLES OF NATIONAL ECONOMY 

circumference may separate men who are working for the pro- 
duction of the same article. The coordination of labor per- 
formed at such widely separated points of space is one of the 
most important and striking aspects of the modern industrial 
system. It is, however, no more important or striking than the 
similar coordination which has taken place between labor per- 
formed at widely separated points of time. Anyone who cares 
to investigate this needs only to find out how long ago the mills 
were built which ground the flour that entered into the bread 
that he ate for dinner, or the factories in which his clothes 
or his shoes were manufactured. Even the hides from which 
his shoes are made grew on animals that were born several 
years ago. 

There are various ways in which this coordination of labor 
performed at different times may be presented to the mind. In 
a primitive state of industry each unit of labor was performed 
by men working with few and simple tools. The tools may 
be said to represent labor performed previously. When the 
worker uses tools his work at the present time is coordinated 
with the work of the man who made them. But since the 
tools were very few and simple, it would be correct to say that 
a given unit of present labor is being coordinated with a very 
small amount of past labor. Under modern conditions the aver- 
age laborer is using more tools, as well as larger and more com- 
plicated machinery, than were used by the primitive laborer. 
These large and complicated machines, like the primitive tools, 
represent labor performed at a previous time. The labor of the 
workmen using them is literally being coordinated with the 
labor of the men who made the machines. Since the tools are so 
numerous, costly, and complicated, it is correct to say that a 
given unit of present labor is being coordinated with a large 
amount of past labor. ■ 

One of the fundamental changes which have come about as 
a result of the modern system of machine production is that of 
coordinating a given quantity of present labor with a much 
larger amount of past labor than was the case under simpler 



ECONOMIZING LABOR 199 

conditions. That is to say, in a simple state of industry a given 
quantity of present labor would work in coordination with a 
small amount of past labor. At the present time, however, a 
given quantity of present labor is found to be working in 
coordination with a large quantity of past labor. 

The coordination of labor performed at different points in 
space does not take place of its own accord. It is done through 
agencies of transportation and communication. Similarly, the 
coordination of labor performed at different points of time does 
not take place of itself ; it takes place because of the willingness 
of men to wait, — to spend their money for producers' goods 
rather than for consumers' goods. If no one were willing to 
wait, if no one were willing to postpone consumption, if every- 
one insisted on living from hand to mouth as the spendthrift 
does, there could be no effective coordination of labor per- 
formed at different times. 

Lengthening the process of production. In order that there 
may be factories, mines must be opened and ore extracted. No 
one wants ore for its own sake ; it is desired because it is a 
means of getting something in the distant future which will be 
desirable for its own sake. Ore must, therefore, be smelted 
and purified into iron and steel. Again, no one wants iron and 
steel for their own sake, but solely because in the distant 
future these commodities will be the means of getting things 
that are desirable in themselves. Again, iron and steel must be 
made into machinery. But no one wants machinery for its 
own sake. Machines are wanted only as they will help to pro- 
duce things desirable for their own sake. It is this constant 
looking ahead and taking thought for the future, accompanied 
by the postponing of present consumption in favor of future 
consumption, that makes possible the coordination of labor per- 
formed at different times. 

Combination of factors. Something more than frugality, 
thrift, and foresight are necessary, however. Without mechani- 
cal ingenuity, however frugal, thrifty, and farsighted a person 
might be; he would find it difficult to exercise these qualities 



200 PRINCIPLES OF NATIONAL ECONOMY 

profitably. Unless someone were able to invent superior meth- 
ods of production which required the exercise of those qualities 
they would be of comparatively little economic advantage to 
those who possessed them. 

Here we have an example of a class of cases which con- 
tinually perplex the amateur student of economics. There are 
cases where two or more factors are absolutely necessary to get 
a given result. Fundamentally the problem is no more obscure 
than that involved in the formula 2x3 — 6. The students will 
agree that 2 is just as essential as 3, and 3 as essential as 2, 
in getting 6. Other problems of a similar kind are found in 
every field of science as well as in arithmetic. Oxygen and 
hydrogen are equally necessary to the formation of water ; air 
and gasoline must be mixed in the carburetor in order that there 
may be an explosion in the gasoline engine. One is as essential 
as the other. The upper and the nether millstone must work 
together in the old-fashioned mill to grind wheat. Two sets of 
rollers are necessary in the modern flour mill. 

In the higher realms of economics we find numerous examples 
of the same type of problem. Forethought and inventiveness 
are examples of mental qualities which are combined to secure 
mechanical progress. However inventive men may be in con- 
triving mechanical improvements, unless someone is willing to 
perform labor long in advance of the consumption of the prod- 
ucts of these mechanical improvements, or pay someone else 
for performing that labor, all these mechanical contrivances will 
remain either in the brains of the inventors or in museums. 

When one has spent his money for iron ore, or for tools of 
any kind, one has become a capitalist. He has bought something 
of no immediate use to him as a consumer, but something which 
is a means by which in the future he may get consumers' goods. 
Because there are, in any community, men who are willing to 
do this, there is a market for the genius of the inventor. Sim- 
ilarly, because inventors will devise mechanical appliances and 
improvements, there is an opportunity for the investor to be- 
come a capitalist, — a buyer of tools and contrivances. 



THRIFT AND NATION BUILDING 201 

These two functions — that of the inventor and that of the in- 
vestor—are absolutely necessary, whatever the type of social 
organization may be. Even in a communistic society the work 
of the inventor amounts to nothing unless the society as a whole 
undertakes what, in the present order of society, the individual 
capitalist undertakes ; namely, to set men to work at making 
tools and to pay them wages while they are about it. One 
important difference between socialism and individualism is 
this : socialism proposes that society as a whole shall do pre- 
cisely what in an individualistic society the capitalist does as 
an individual. 

The productivity of capital. There are some extreme so- 
cialists who deny that the capitalist performs any necessary 
function. If that were true it would be hard to frame an argu- 
ment to show that society as a whole should do precisely what 
the capitalist is doing. The socialist would then have to admit 
that the capitalist, instead of performing a useless function, per- 
forms a most important one, — so important that society as a 
whole should take it over. To say that society should do its 
own investing is to say that it should become its own capitalist. 
This would present a question to be debated. The question 
might be stated as follows : Can the useful function of coordi- 
nating labor performed at different times be done more econom- 
ically and satisfactorily by the state, or by society as a whole, 
than by private individuals ? Or the question might be put in 
this way : What forms of investment and ownership should be 
undertaken by society as a whole and what should be left to 
private individuals? Only extremists would refuse to discuss 
this question. There are, however, some who are so very ex- 
treme as to deny that the state or society should do any invest- 
ing or own any capital. Others go to the opposite extreme by 
denying that the individual should do any investing or own any 
capital. Wisdom probably lies somewhere between the two 
extremes. The real difference, therefore, between the reasonable 
socialist and the reasonable individualist is one of degree. The 
reasonable individualist will maintain that, in the absence of a 



202 PRINCIPLES OF NATIONAL ECONOMY 

special or convincing reason to the contrary, the individual 
should be allowed to invest and to own capital, and that the case 
must be proved against him before he is forbidden to do so. 
The reasonable socialist, on the other hand, holds that the pre- 
sumption is in favor of public and against private ownership of 
capital, — that, unless special and convincing reason to the con- 
trary is shown, the public and not private individuals should 
own capital. He places the burden of proof on the one who 
wishes to own private capital. 



CHAPTER XIII 
THE RELATION OF THRIFT TO NATION BUILDING 

The ultimate purpose of thrift. That increasing supplies of 
capital, either public or private, are necessary to the attainment 
of the highest national prosperity, can scarcely be denied. Un- 
less the public should undertake the task of setting aside by 
law a portion of the national income for the purpose of increas- 
ing the fund of capital, it must be done by the action of private 
individuals. This calls for the exercise of the virtue of thrift.^ 

What is thrift ? In order to get a clear idea of the relation 
of thrift to the strength of the nation it will be necessary to 
analyze the nature of thrift. To begin with, it should be per- 
fectly clear that thrift does not mean the hoarding of money. 
To hoard money is one of the most thriftless things one can do 
with it. The miser of romance who kept his money in a secret 
hoard where he might gloat over it and enjoy the sensations of 
feeling, hearing, and seeing it was, in the strictest possible sense, 
a thriftless consumer of wealth. Instead of using money as a 
tool of production or instrument of business, he was using it as a 
means of direct physical enjoyment. To use it for the adorn- 
ment of his body would scarcely have been more frivolous, 
thriftless, or selfish. 

Spending money wisely. Thrift, no less than extravagance, 
consists in using money ; that is, in spending it. The sole dif- 
ference is in the purpose or purposes for which it is spent. To 
spend money for immediate and temporary gratification is 
extravagance ; to spend it for things which add to one 's power, 
mental, physical, moral, or economic, is thrift ; to spend it for 

iSee monograph by the author, entitled "War Thrift." Carnegie Endowment 
for International Peace, 1919. 

203 



204 PRINCIPLES OF NATIONAL ECONOMY 

tools of production wherewith one may increase one's produc- 
tive power is thrift. For a farmer to spend money on a luxuri- 
ous automobile, when he needs a tractor with which to cultivate 
his land, is extravagance ; to spend the same amount of money 
for a tractor, when he needs one with which to cultivate his land 
more thoroughly and increase his productive power, is thrift. 
Money is spent as truly in one case as in the other. It stimu- 
lates business as effectively in one case as in the other. But 
when money is spent extravagantly it adds nothing to the pro- 
ductive power either of the individual or of the nation. To 
spend it thriftily is to add to the productive power of both the 
individual and the nation. 

What if everyone were thrifty. It is sometimes argued, of 
course, that if everybody spent all his surplus income for tools 
of production and nobody spent anything for luxuries, there 
would soon be overproduction ; that is, the community would 
soon have such a supply of tools of production as to enable it 
to produce more than its thrifty consumers were willing to buy. 
Whatever validity this argument may have sometime, it would 
obviously not apply to normal conditions when the danger is 
not of overproduction but of underproduction ; when the prob- 
lem is not how to consume the things which are produced but 
how to produce the things which are necessary to the building 
up of the country ; not how to give the people the largest num- 
ber of pleasurable sensations but how to develop the maximum 
national strength. 

. Effects of thrift. The fear of overproduction is groundless, 
even in normal times. The tendency in a thrifty community is 
for capital (that is, the tools of production) to increase and 
become so abundant as to reduce the rate of interest, giving the 
owners of capital a smaller share of the product and conse- 
quently giving the other participants in production a larger 
share. In addition there is a larger production in a thrifty 
community because such a community is well supplied with all 
tools and instruments of production. The danger that there 
should be an oversupply of capital (that is, of tools) is counter- 



THRIFT AND NATION BUILDING 205 

acted by the tendency of interest rates to fall, thus reducing 
somewhat the inducement to save. The economic forces work 
in precisely the same way to check the overaccumulation of 
capital as they do to check the overproduction of wheat, pota- 
toes, or anything else. When there is a tendency toward the 
overproduction of wheat the price tends to fall, and this acts as 
an automatic check on further production by removing one of 
the inducements to the production of wheat. 

Thrift and overproduction. The theory that too much thrift 
would result in overproduction is precisely like the theory that 
too much industry would do the same thing. One might argue 
that if our moralists and preachers of righteousness continue to 
extol the virtue of industry and encourage all the people to 
work rather than to waste their time in sloth and idleness, the 
people might make the mistake of producing too much. Thrift 
and industry have very much the same effect in the long run on 
the total volume of production. Thrift is the means by which 
the community equips itself with durable goods and with the 
instruments of production. The community that spends all its 
income for immediate gratification can never add to its indus- 
trial equipment. The community that spends a part of its 
income not for immediate gratification, but for the distant 
future, for things' which add nothing to its immediate satisfac- 
tion but which increase its productive equipment, is a com- 
munity which grows in productive power from year to year and 
from generation to generation. Industry without thrift is as 
ineffective as is thrift without industry. The two together form 
the twin pillars of all industrial prosperity. 

Spending money and hiring labor. What has been said re- 
garding the direction in which money is spent leads naturally 
to a consideration of the function of the spending of money in 
giving direction to the national energy. The energy of a com- 
munity or a nation is directed either by authority or by persua- 
sion. Men do either what they are told or what they are 
persuaded to do. By persuasion, however, is meant not merely 
verbal argument and wheedling ; it includes the lure of personal 



2o6 PRINCIPLES OF NATIONAL ECONOMY 

advantage, the desire of pleasing someone whose good-will is 
esteemed, and a multitude of other things, — in short, it includes 
practically everything which induces a man to act or which 
supplies him with motivation, except the fear which lies back of 
all authority. Not the least important among the various forms 
of persuasion is the offer of a reward, pecuniary or otherwise. 
To offer a price for a commodity or a service is to attempt to 
persuade someone to produce the commodity or to render the 
service. Among all free peoples this form of persuasion has 
come to play a very large part in the direction of national 
energy. The gradual substitution of this form of persuasion for 
government authority is one of the most significant earmarks of 
progress. In a low state of civilization and in a militant society 
men do very largely what they are ordered to do by government 
authority. In a higher and freer state of civilization they do more 
and more what they are persuaded to do by the prices which are 
offered on the market. A high price for one thing and a low 
price for another mean a larger inducement for the production 
of one thing and a smaller inducement for the production of the 
other. A rising price for one thing and a falling price for an- 
other represent the attempt of the purchasing public to induce 
more productive energy to begin producing one thing and less 
productive energy to remain in the production of the other. 

Redirection of national energy. Suppose, for example, it 
were a foregone conclusion that many more shoes were needed 
than were in process of production. There would be two ways 
of increasing the production of shoes. In the one case the 
government might by its own authority order an increase of 
production, and detail a certain number of men from other in- 
dustries or command them to enter the shoemaking industry. 
In the other case they who want more shoes than they have 
begin to bid for them and offer higher prices in order to get 
them. These higher prices have the same effect in redistribut- 
ing the labor power of the country as the government order 
would have in the other case. In order to obtain these higher 
prices, existing factories would speed up, would run overtime, 



THRIFT AND NATION BUILDING 207 

would employ more men, or else new factories would be built 
to meet the increasing demand. 

In case the desires of the public should undergo a consider- 
able change, and the people should stop caring for one class of 
commodities and begin caring intensely for an entirely different 
class, the same alternative methods would present themselves. 
It would be necessary, of course, in order that production might 
adjust itself to the demands of the consumers, that considerable 
productive power should be transferred either directly or indi- 
rectly from the industry which was producing the article for 
which there is a shrinking demand to the industry which was 
producing the article for which there is an expanding demand. 
This transfer of productive power could be effected by govern- 
ment authority. The government could merely say to a certain 
number of men, ''Leave this industry and go and work in the 
other," precisely as soldiers are ordered to transfer their efforts 
from one part of the field to another. In a low state of civili- 
zation this method is used in redistributing the forces of the in- 
dustrial army, but in all higher civilizations the method is that 
of persuasion. The article for which the people no longer care 
will not be bought in large quantities, and the people will not 
be willing to pay a high price for it. • That in itself will partially 
remove the inducement to production. A certain amount of 
productive power will therefore be released from this industry. 
On the other hand, the article for which there is an increasing 
demand cannot at once be supplied in sufficient quantities to 
meet that demand. Some consumers will not be able to get 
what they want, and they will begin bidding against one another 
for the limited supply, thus forcing the price up. This advance 
in price is the persuasion which will lead investors, manufac- 
turers, and laborers to go into the industry which produces the 
article in question. Thus, in the course of time, the transfer 
of productive power from the contracting to the expanding 
industry is made as effectively as though it had been made by a 
government order. It may be made a little less promptly, but 
much less violently, with less disturbance and with greater econ- 



2o8 PRINCIPLES OF NATIONAL ECONOMY 

omy. In the industrial field promptness and secrecy are of less 
importance, and economy is of greater importance. That is 
why the tendency in all advanced industrial communities is 
toward the method of price persuasion and away from the 
method of government compulsion. 

Effects of thriftlessness. Before we are in a position to under- 
stand the fundamentals of the thrift question it cannot be too 
much emphasized that in a free industrial society the way in 
which the people spend their money determines the direction in 
which the productive energy of the community is utilized. If, 
for example, no one is willing to purchase tools, or instruments 
of production, but everyone demands articles of immediate en- 
joyment, tools will, of course, have no buyers and the tool- 
making industries will have no inducement to expand or even to 
continue. All the productive energy will be absorbed by the 
luxury-producing industries and even they will be poorly 
equipped, because no one will be willing to invest in equipment. 
Where one group of people is demanding luxuries for immedi- 
ate consumption and another group is willing to invest in the 
tools of production, the latter group may then equip the luxury- 
producing industries with tools in order to produce for the 
supply of the former group. If all were willing to spend money 
on tools and no one were willing to spend very much on extrava- 
gant frills, there would be an abundance of tools for the produc- 
tion of all the things which would supply the moderate needs of 
the community. With these moderate needs supplied by the 
abundant productive power of the community, the people could 
work either short hours or in a leisurely manner, or they could 
use their abundant energy in producing things of durable or 
permanent value, such as school buildings of architectural 
beauty, roads, irrigation projects^ the drainage of swamps, and 
in various other enterprises which would provide for posterity, 
enlarge the possibility of life in the national territory, and 
greatly expand the national power and greatness. 

Spending money for things we like best. If the people of 
Athens had chosen not to adorn the Acropolis with architectural 



THRIFT AND NATION BUILDING 209 

monuments, they might for a long time have consumed somewhat 
more luxurious food, worn somewhat more costly apparel, and 
amused themselves in somewhat more expensive ways ; that is, 
they could have devoted the national energy to the production 
of more luxurious food, clothing, and so forth. Instead of that, 
they chose to consume slightly less luxurious food and to wear 
slightly less costly clothing than they might have had, in order 
to erect those buildings which, if the Athenians had done noth- 
ing else, would have helped to justify their existence. It was 
the direction in which they decided to spend their money which 
decided whether the national energy should be used in the pro- 
duction of ephemeral utilities or durable sources of satisfaction. 

The people of those medieval cities who erected cathedrals 
as monuments of their religious faith could, if they had chosen 
otherwise, have fed, clothed, and amused themselves in more 
expensive ways ; that is, the man power which was used in the 
erection of churches could have been used in the produc- 
tion of objects of temporary gratification. They chose to spend 
their money for durable rather than for perishable goods, and 
that is why the world was enriched by the religious architecture 
of the medieval period. Any modern city that chooses to get 
along with ineffective school buildings can for a few years keep 
its tax rate down' slightly and the people may therefore have a 
little more money to spend on trivialities. If, on the other hand, 
they choose to construct school buildings whose architecture 
will enrich the world as did the church architecture of the 
medieval period, they will have to cut down the amount of 
money which they would spend for other things and release a 
certain amount of productive energy from the manufacture of 
frills and luxuries, so as to make it available for the production 
of these objects of durable satisfaction. 

Whether one thinks that it was the thrift or the extravagance 
of the Athenians that built the Parthenon will depend upon 
whether one thinks that the building of the Parthenon was 
an important thing to do or not. If he regards it as a trivial- 
ity, then he will call the building of it an extravagance, and 



210 PRINCIPLES OF NATIONAL ECONOMY 

doubtless think how much better it would have been if the 
Athenians had used the same amount of money in purchasing 
and the same amount of energy in producing things which 
would have fed their bellies or adorned their bodies. If, on the 
other hand, he thinks that it was a very important thing to do — 
more important than anything else that they could probably 
have done with their money and their productive energy — he 
will say that it was thrift which built the Parthenon. The 
same question might be discussed with respect to the religious 
architecture of the Middle Ages, and the same question, of 
course, arises in every city of the present day when the problem 
of school architecture is discussed. To one who regards school 
architecture as a triviality the erection of magnificent and well- 
equipped school buildings would seem an extravagance; he 
would doubtless regret that so much productive power should 
be used in the building of such things when it might be used for 
the production of articles that would gratify the appetite or 
some other temporary desire. But to one who regards school 
architecture as something very important, the erection of such 
school buildings as some people would like to see would seem 
an act of thrift. 

Summary. The general argument for thrift may be sum- 
marized as follows : He who saves money and invests it wisely 
does himself good in two ways. He gains directly by having an 
income in addition to his wages or his salary. He gains indi- 
rectly by making better conditions for everybody, including 
himself. 

It is easy to see that he gains directly. To have a hundred 
dollars invested, even at 4 per cent, is better than not to have 
it. It gives him four dollars a year over and above his other 
income; and four dollars a year, small as it is, is not to be 
despised. 

It is not so easy to see, but it is none the less true, that 
saving and wise investing make conditions better for every- 
body, including oneself. To save and invest, as stated above, 
is not to hoard. It is to buy things which are needed for pro- 



THRIFT AND NATION BUILDING 211 

duction or defense instead of things which are good only for 
consumption or pleasure. To buy things, such as tools, ma- 
chines, buildings, etc., which aid in production is to encourage 
the making of such things. When many people are invest- 
ing in tools, many tools will be produced and industry will 
then be well equipped with aids to production. In short, 
there will be many factories well equipped with buildings, 
machines, and materials. That is a condition in which there 
is much employment. 

One may buy either directly or indirectly those things which 
aid in production. When a farmer buys a traction engine 
rather than a luxurious automobile he is buying directly a thing 
which aids in production, rather than an article of consumption. 
If he has bought wisely the traction engine will aid him to grow 
a larger crop, which is a good thing for him. It will also increase 
the food supply, which is a good thing for everybody. The 
more farmers there are who save money and invest it in instru- 
ments which aid in production, the better production we shall 
have and the better the world will be fed. When a factory 
owner builds an addition to his factory rather than a new dwell- 
ing house, he is buying directly various things which aid in 
production. If he builds wisely he will add to his income, which 
is a good thing for him. It will also add to the productive 
power of the community, which is a good thing for everybody. 
It is a good thing especially for laborers, because it will require 
more laborers to run the enlarged factory than were required be- 
fore it was enlarged. In short, it increases the demand for labor. 

The more people there are who save their money and buy 
tractors, machines, factory buildings, and all other aids to pro- 
duction, the better the community will be supplied with all such 
things. The better the community is supplied with all such 
things, the greater its productive power and the greater the op- 
portunities for productive employment. That is the reason 
why laborers always emigrate from a country where there is 
little saving and investing to a country where there is much 
saving and investing. 



212 PRINCIPLES OF NATIONAL ECONOMY 

Indirect buying of producers' goods. But one may buy indi- 
rectly things which aid in production. When one deposits 
money in a savings bank, the bank will invest it. It may lend it 
to some farmer who wants to buy a tractor, a team, a cow, or 
some other aid to production. It may buy part ownership in 
some factory or in some other way encourage the buying of aids 
to production. The saver may himself buy the share in some 
corporation. In that case he becomes a part owner in the fac- 
tory or whatever it is that the corporation owns. In all these 
ways and in many others one may buy indirectly all sorts of 
things which aid in production. 

Indirect buying of such things has the same effect as direct 
buying. It encourages others to make the tools, machines, 
buildings, and other things which aid in production. Nobody 
would make such things unless somebody would buy and pay 
for them. The only people who buy and pay for them are those 
who save and invest, who buy fewer articles of consumption 
than they might buy, and who spend the money thus saved for 
things which aid in production. That is what it means to 
save and invest. 



CHAPTER XIV 

FORMS OF BUSINESS ORGANIZATION 

Large capital necessary. The growth of machine production 
is the result of mechanical invention, but it has, in turn, made 
necessary such large aggregations of capital as to require the 
combined accumulations of numbers of men. In comparatively 
few cases does a single individual possess enough capital to 
equip a modern factory, railroad, steamship company, mine, or 
even a large mercantile house. Were it not possible to combine 
the capital of a number of individuals, large-scale production 
would be the privilege of only a few very wealthy men. 

Methods of combining capital. There are three distinct meth- 
ods of combining capital : one is known as the partnership ; 
another is the corporation, or joint-stock company ; and the 
third is the cooperative society. The partnership is a simple 
combination of two or more individuals in the ownership and 
management of a given business, in which each partner is fully 
responsible for the acts and liabilities of the group. The part- 
nership is merely an enlargement of the individual. The in- 
dividual who owns and operates his own business is, of course, 
fully responsible for all debts and obligations, and, subject to 
bankruptcy and homestead laws, all his property may be taken 
in payment of any obligation incurred in the business. Where 
two or more men join in a partnership each partner is respon- 
sible in the same sense and to the same extent as if he were 
the sole owner. 

Difficulties of partnership. Obviously a partnership on these 
terms is possible only among men who are very intimately 
acquainted with one another and who have complete confidence 
in one another. Since each partner is fully responsible for the 

213 



214 PRINCIPLES OF NATIONAL ECONOMY 

acts of every other, it would be extremely hazardous, not to say 
foolhardy, for anyone to form a partnership with an individual 
with whom he was not intimately acquainted and concerning 
whose honesty and solvency he had the slightest suspicion. In- 
competent or dishonest partners have caused the financial ruin 
of many an otherwise sound and capable business man. 

The corporation. The modern expansion of business would 
hardly have been possible without some form of organization 
which would permit the association of larger numbers of men 
than are possible under a partnership. This has given rise to 
the corporation, or the joint-stock company. The distinguish- 
ing difference between the corporation and the partnership lies 
in what is known as limited liability. In a corporation the 
liability of each shareholder is strictly limited. The corpora- 
tion may become bankrupt, but the individual members or 
shareholders can be called upon only for definite sums to make 
good the debts of the corporation. In the ordinary case each 
individual puts a certain sum of money into the fund. This 
may be lost, but he cannot be called upon for additional sums to 
make good further losses. In other cases, such as our national 
banks, the shareholder may not only lose what he has put into 
the fund but may be assessed an equal amount in addition. 
This is sometimes called double liability, but even in this case 
the shareholder's liability is limited and his whole property is 
not hazarded as it is in a partnership. 

Suppose, for example, it were considered necessary to have 
$100,000 of capital with which to start a business. This 
capital may be divided into a thousand shares of Sioo each. 
(A larger number of shares of smaller denomination or a smaller 
number of larger denomination may, of course, be decided 
upon.) These shares are represented by bits of printed paper 
which serve as evidence to show that the money has been put 
into the fund. A thousand different individuals may buy one 
share each, or a smaller number may each buy a different num- 
ber of shares. For each $ioo which any individual puts in he 
receives one of these bits of paper, which have come to be called 



FORMS OF BUSINESS ORGANIZATION 215 

shares, or stock certificates, or some other such name. After the 
shares are all sold, there is the fund of $100,000 in money avail- 
able for starting the business. The general rule is that each con- 
tributor shall have a vote for each share which he has purchased. 
It would, therefore, be possible for one individual to own more 
than half the shares, provided he had invested more than 
$50,000 in the enterprise. Owning more than half the shares, 
he could always cast the majority vote and control the corpora- 
tion, electing himself and his particular friends to all the 
offices and virtually controlling the business. In some cases, 
however, such a concentration of ownership is not permitted. 

Limited liability. Only the officers of the corporation are 
empowered to act for the corporation ; the individual share- 
holder who is not an officer' has no power to obligate the 
corporation in any way. One therefore does not need to scruti- 
nize the solvency or the character of his fellow shareholders as 
closely as would be necessary in a partnership. Again, the 
individual shareholder has no responsibility for the acts of the 
corporation beyond that which has already been indicated ; 
that is, if the business fails, the affairs of the corporation may 
be wound up, but he can lose only the sum which he originally 
subscribed, or, in the case of double liability, that sum plus 
an equal sum. 

Some weaknesses of the corporation. This device of the joint- 
stock company with limited liability has made possible the 
aggregation of vast sums of capital, running up into millions 
and hundreds of millions of dollars, for the purpose of carry- 
ing on great business enterprises. Individuals who never saw 
or heard of one another, living in different parts of the country, 
sometimes in different parts of the world, may own shares in 
the same corporation, having contributed their capital to the 
joint fund for the carrying on of the business. This has been 
one of the great factors in building up all modern enterprise. 
It is almost as important as some of the great mechanical in- 
ventions. But, like all great inventions, it carries with it 
certain difficulties. For example, it has made individual enter- 



2i6 PRINCIPLES OF NATIONAL ECONOMY 

prise a practical impossibility, except in those cases where 
small-scale production is as efficient as large-scale production. 
On the other hand, it has given individuals with only small 
sums of capital to invest the opportunity to participate in the 
profits of large-scale production. In the latter sense it has been 
a democratic institution. The fact, however, that individuals 
vote in proportion to the number of shares which they own 
has tended to destroy some of the democracy and, in some cases 
at least, to put the management of the corporation into the 
hands of a plutocratic oligarchy; that is, a few large stock- 
holders who control the majority of the stock can always 
control the corporation, sometimes to the disadvantage of the 
small shareholders, who can never cast a majority vote. Vari- 
ous limitations upon the voting power have been proposed and 
introduced for the purpose of curbing the rapacity of the large 
shareholders. In spite of these, however, many a fortune has 
been built up through the machinations of large shareholders 
and the robbing of small shareholders. 

Multiplied power and divided responsibility. Another disad- 
vantage of the corporation is found in its impersonal character. 
A decade or so ago the social psychologists were engaged with 
the problem of the mob mind. Before the analysis was carried 
very far it was discovered that the mob mind did not present 
any special mystery as distinct from the individual mind. 
The mob thinks and acts as any of its individuals would think 
or act, were his power greatly increased and his sense of respon- 
sibility greatly diminished. That is precisely what the presence 
of numbers does for the individual when the totality is moved 
by a common impulse — it gives him a sense of power propor- 
tionate to the numbers, and at the same time the very fact of 
numbers diminishes his own sense of responsibility. That is 
why the mob is so like a monster, for the difference between a 
man and a monster is precisely that, — the monster feels a sense 
of power but lacks a sense of responsibility. 

Something of the kind exists in the case of the industrial 



FORMS OF BUSINESS ORGANIZATION 217 

corporation. There also you have increased power and dimin- 
ished responsibility. The sense of power comes not so much 
from the presence of numbers — as in the case of the mob — as 
from the larger fund of competitive capital which is brought 
together. The diminished sense of responsibility comes partly 
from the mere fact of numbers (no individual member of the 
corporation feels the full responsibility for the acts of the 
whole), partly from the impersonal character of the conduct 
of the corporation, and partly from the limited-liability feature 
of most of the charters. Most of the evils of corporation prac- 
tice grow out of this simple situation, and the remedy must be 
applied at this point. The sense of responsibility must be made 
commensurate with the sense of power. 

This is to be accomplished not by reducing the powers of 
corporations so much as by increasing the sense of responsi- 
bility of its individual members. If they can be made to feel 
the same responsibility for the acts of the corporation which 
they feel for their individual acts, the corporation problem as 
such will be solved ; and it will be solved in no other way. This 
means the frank adoption of the maxim that crime is always 
personal and that corporate law-breaking is to be dealt with in 
precisely the same way as individual law-breaking. 

Size a matter of importance. In fact, it may be necessary to 
go even farther and enforce stricter responsibility upon members 
of corporations — particularly the larger corporations — than 
we do upon individuals. If the principle we have laid down is 
sound, it furnishes no support to the view that the mere bigness 
of a corporation is not a matter for the law to take into account. 
From our point of view bigness is an important factor in the 
problem ; for the bigger the corporation, the greater its power 
and the less the sense of responsibility on the part of each 
member. This situation alone calls increasingly for strict 
regulation and enforcement of responsibility, the bigger the 
corporation becomes. Its increased power is a good thing, pro- 
vided that power be used productively and not acquisitively; 



2i8 PRINCIPLES OF NATIONAL ECONOMY 

but there is no certainty that it will be used productively unless 
subjected to the strictest control. 

This does not mean that large corporations have worse dis- 
positions than small ones or that their members are meaner men 
than the members of small corporations. It means only that 
the disproportion between power and responsibility increases 
with the size of the corporation. 

As a homely illustration let us take the common house cat, 
whose diminutive size makes her a safe inmate of our household 
in spite of her playful disposition and her liking for animal 
food. If, without the slightest change of character or disposi- 
tion, she were suddenly enlarged to the dimensions of a tiger, 
we should at least want her to be muzzled and to have her claws 
trimmed ; whereas if she were to assume the dimensions of a 
mastodon, I doubt whether any of us would want to live in the 
same house with her. And it would be useless to argue that her 
nature had not changed — that she was just as amiable as ever, 
and no more carnivorous than she always had been. Nor would 
it convince us to be told that her productivity had greatly in- 
creased and that she could now catch more mice in a minute 
than she formerly could in a week. We should be afraid lest, 
in a playful mood, she might set a paw upon us, to the detri- 
ment of our epidermis, or that in her large-scale mouse-catching 
she might not always discriminate between us and mice. 

Stratification of society. There is another problem, not 
strictly a corporation problem but a social problem, growing 
out of the prevalence of the corporate form of industrial organ- 
ization ; that is, the problem of the widening gap between em- 
ployers and employed, or, more strictly, between capitalists and 
laborers. It may be laid down as a general social law that 
anything which separates people into sharply distinguishable 
groups — whether it be a geographical boundary, a racial differ- 
ence, a difference of religious creeds, or a class distinction — 
will produce between the groups thus separated, first, ignorance 
of one another, then suspicion growing out of that ignorance, 



FORMS OF BUSINESS ORGANIZATION 219 

then misunderstanding growing out of that ignorance and sus- 
picion, and, finally, open warfare whenever a pretext is found ; 
whereas anything which bridges over these gaps, or brings peo- 
ple together regularly and normally, creates, first, knowledge of 
one another, then confidence instead of suspicion, then under- 
standing instead of misunderstanding, and, finally, lasting peace 
because no difficulty seems large enough to serve as a pretext 
for war. 

Now the joint-stock form of organization, though a most 
effective industrial device, has had at least one serious social 
result : it has widened somewhat the gap which would other- 
wise have existed between the employing group and the em- 
ployed group. When employers are known by their personality 
and can come into some kind of personal or direct contact with 
employees and when, therefore, employer and employee know 
something about one another, there can be no such degree of 
suspicion of one another as now exists ; where ignorance dis- 
appears, suspicion tends to disappear also. But when employ- 
ers stand, as the shareholders of a corporation, in a purely 
impersonal relation to employees, — when the average employer 
or shareholder knows nothing personal about the employees 
of the corporation and the employees know absolutely noth- 
ing personal about the shareholding employers, — there is on 
either side of the fine about as great a degree of ignorance 
of those on the other side as can be found anywhere in modern 
social life. 

Widening the gap between social classes. The gap which sep- 
arates the two groups is made so wide as to produce very much 
the same result as is produced by a difference of color between 
races or a difference of religion between two sharply contrasted 
religious groups. Such a state of things has never failed in the 
history of the world to produce suspicion, jealousy, misunder- 
standing, and, on the slightest pretext, open hostility ; and, so 
far as we are able to see into the future, there is not the slightest 
ground for hoping that such a condition will ever fail to pro- 



220 PRINCIPLES OF NATIONAL ECONOMY 

duce these same undesirable results. In other words, we need 
not hope for social peace or for any cessation of the conflict of 
classes until that chasm is in some way bridged over or made 
to disappear. 

This result can hardly be achieved by doing away with joint- 
stock corporations, — they are too effective as industrial devices 
to make such a program tolerable. But if we are ever to have 
anything resembling social peace, some way must be found to 
bring the employing classes and the employed into personal 
relationship one with another. The ideal is undoubtedly that 
of having the workers in our industrial establishments become 
also owners of the stock of the corporation. If that result could 
possibly be achieved, there would be an end of the present 
phase of warfare. 

How this is to be achieved is another question. It will never 
be achieved until our corporation laws and our judicial pro- 
cedure relating to corporations are made efficient enough to 
make it a safe venture for a man of small means to buy a share 
in an industrial corporation. So long as these things are so in- 
efficient as to enable large shareholders and rings to "freeze 
out" the small shareholders, or in any way to make it hazardous 
for a man of small means — such as the average workingman — 
to invest in a share, it will never be accomplished. This looks 
like a legal problem rather than a legislative problem, and it is 
for the legal fraternity and the courts to solve. 

The trust. It is important that we distinguish between the 
corporation, as we have just described it, and the trust, or com- 
bine. The corporation is an organization of individuals who 
put their capital together in order to carry on a business which 
requires more capital than is likely to be possessed by any one 
of them. The trust, or combine, is mainly an organization of 
corporations (though it may include also a few individual capi- 
talists) for the purpose of controlling the market. While such 
organizations are to be distinguished sharply from corporations 
as such, nevertheless they could scarcely have come into ex- 



FORMS OF BUSINESS ORGANIZATION 221 

istence if the corporation had not preceded them and prepared 
the way. They may therefore be called extreme developments 
of the corporation idea, though not necessary developments. 
As to these extreme developments of the corporation principle, 
it is becoming more and more apparent that their power for 
evil lies wholly in their power of controlling and manipulating 
prices. If that power could be taken out of their hands, we 
should then have nothing to fear from them. 

Control of prices. If they could not succeed in competition 
through their power over prices, they could then succeed only 
through their power of production. If they should then sur- 
vive, the mere fact of their survival would prove their fitness 
to survive. This has been pointed out many times by scholars, 
but the practical politicians, with their unerring instinct for 
the wrong way, have ignored it and have been trying various 
hard and useless methods of dealing with the problem. Even- 
tually, after having tried every possible way of going wrong, 
we shall apply the simple and direct remedy of government 
control of prices wherever a monopoly exists. 

It is not necessary to indulge in any sentimental rhapsodies 
on the subject of the people and their control over affairs of this 
kind. Government affairs are controlled by politicians, and 
politicians are no- more interested in the people than are the 
trust magnates themselves. The choice is a hard one. But 
where competition fails to regulate prices, these prices are go- 
ing to be fixed arbitrarily by someone. In the absence of gov- 
ernment control they are fixed by the trust operators alone. 
Where there is government control they are fixed by the joint 
action of the politicians and the trust operators. Their inter- 
ests are not the same ; and, as the result of their pulling and 
hauling, prices will not be fixed quite so completely in the in- 
terest of the trusts but more in the interest of the trusts and 
the poHticians. Since the people can control the trusts after a 
fashion by refusing to buy from them, and the politicians after 
a fashion by refusing to vote for them, it will happen that 



222 PRINCIPLES OF NATIONAL ECONOMY 

through this double control the interests of the people will be 
somewhat better safeguarded than they are now. 

Incidentally this would destroy most of the trusts. No trust 
exists by virtue of its superior productive powers. Each one 
depends for its existence upon its superiority in buying and sell- 
ing; that is, upon its power over prices. Take away this power 
and enable the outside concerns to match their productivity 
against that of the trust, and outside competition will increase, 
forcing the trust to break up into its most efficient productive 
units, as distinguished from the most efficient bargaining units. 

The cooperative society. It has often been proposed to sub- 
stitute a radically different form of business organization for 
the corporation, or joint-stock company. This is known as the 
cooperative society. In a sense the corporation itself is coopera- 
tive, but it differs from the cooperative society in two funda- 
mental characteristics : In the first place, the corporation 
involves cooperation among the owners, whereas a genuine 
cooperative society involves cooperation among the workers. 
In the discussion of the corporation it was pointed out that the 
rise of modern industrial conditions had brought about a sharp 
separation of owners and workers. In the original form of 
manufacturing (that is, the small shop, where the workman 
owned the shop and the tools) we had the functions of owner- 
ship and of labor combined in the same individual. With the 
rise of the factory system these two functions were separated. 
The corporation represents the organization of owners and 
maintains the separation of owners from workers. The coopera- 
tive society, on the other hand, represents an association of 
workers. Under the corporation, ownership and management 
go together ; under the cooperative society, labor and manage- 
ment go together. In the second place, in a corporation, as we 
have seen, the various individuals who contribute capital vote 
in proportion to the number of shares which they own. In a 
cooperative society each individual has one vote, regardless of 
the number of shares which he owns or the amount of capital 
which he has put in. One man one vote is the rule here, where- 



FORMS OF BUSINESS ORGANIZATION 223 

as one share one vote is the rule of the corporation. It is in- 
accurate, however, to say that capital votes in a corporation. 

As to the comparative merits of these two forms of organ- 
ization, the opinion of the world is somewhat divided. It must 
be admitted that the corporation has had much the larger 
growth, though in recent years the cooperative society has been 
gaining ground rapidly. 

Comparative merits of the corporation and the cooperative 
society. It is the opinion of the present writer that the question 
will always be decided on rather definite economic grounds. 
Where the difficult problem is that of getting sufficient capital, 
he who supplies the capital must be placated ; that is to say, 
where everything else is easily obtainable, where there are al- 
ways plenty of laborers seeking employment, plenty of raw 
material to be had, and buyers ready to buy the finished prod- 
uct, but where the limiting factor is capital and the puzzling 
thing is to know where to get it, favorable terms must be offered 
to the capitalist and he must be allowed to have his way, or 
the capital cannot be secured. In the early stages of manufac- 
turing expansion, capital was the limiting factor. 

The limiting factor will dominate. Now and then conditions 
arise under which capital is not the limiting factor. x\mong 
farmers, for exaniple, where a creamery is needed, it is never 
very difficult to raise capital to equip the creamery; the diffi- 
culty is to get business, — that is, to get the farmers to produce 
the milk and sell the cream to the creamery. In these cases the 
producer of milk must be placated and persuaded to join the 
organization. He must, therefore, be given control. This gives 
rise to what is known as the cooperative creamery, in which 
the producing farmers own the plant, direct its management, 
and share in its profits. Such a creamery, however, is coopera- 
tive only in a special sense. The men who work in the creamery 
are employed as other laborers would be employed in a pri- 
vately owned factory of any kind. A cooperative store is like- 
wise dependent upon custom. It is easier to get capital and to 
hire clerks and salesmen than it is to induce people to trade at 



224 PRINCIPLES OF NATIONAL ECONOMY 

the store. Therefore the patrons of the store must be placated 
and given control. The great cooperative societies, as pointed 
out in the chapter on Competition, have been societies where 
cooperative buying and selling has been substituted for compet- 
itive buying and selling. That is, they have been mercantile so- 
cieties. They do not represent cooperation among producers or 
among the workers in the stores and factories, for the workers 
in the stores and factories are hired on the same terms as 
workers in the privately owned or corporation-owned stores 
and factories ; in short, they are not examples of pure coopera- 
tion but of quasi cooperation ; that is, they are cases of coop- 
erative buying or selling among independent producers and not 
of cooperative production. 

There are a few cases of real cooperation^ but they are not 
very conspicuous. The only real cooperation is that which 
obtains among workers, where the men who do the work in a 
factory manage it themselves or direct its management and fur- 
nish or hire the capital. This form of cooperation has not yet 
proved very successful, mainly because labor has seldom been 
the limiting factor. It is generally so easy to get labor that the 
laborer does not have to be placated and given much control. 
When the time comes, as it probably will, that labor is scarce 
and hard to find, — when it is necessary to placate the laborer 
rather than the capitalist or the purchaser of finished products, 
— then we may expect that this form of cooperation will gain 
ground. If the laborer has to be placated in order to induce 
him to work in an establishment, he will be given more and 
more control over it. 

Control by the indispensable person. Generally speaking, the 
indispensable man, whether he be the one who furnishes capital, 
the one who furnishes raw material (as in the case of the 
cooperative creamery), the one who buys the finished product 
(as in the case of the cooperative store), or the one who sup- 
plies the labor (as in the case of the true cooperative society), 
is in so strong a position that he can dictate terms to all the 
others. When the laborer becomes indispensable (that is, so 



FORMS OF BUSINESS ORGANIZATION 225 

scarce and hard to find that the average business enterprise 
must wait on his will) he will be in so strong a position that he 
can dictate terms to all the others who participate in the enter- 
prise. He will then, without resort to force, really direct 
its management on a purely voluntary and contractual basis. 
There is not a very good prospect for cooperation among labor- 
ers under any other conditions. There is a strong probability 
that, with the rapid accumulation of capital (especially if habits 
of frugahty and saving are encouraged) and with the growing 
scarcity of labor (especially if wise immigration laws are passed 
and a high standard of living among laborers is encouraged), 
there will come a time when capital will be almost superfluous 
because of its great abundance, and every individual laborer 
will become almost indispensable because of the scarcity of 
labor. Then we must expect that capital will lose the power to 
direct the management of industries and will take the position 
of a hireling. The laborer will then gain control and assume the 
position of the master. This mastery, however, will not be ac- 
quired by force, unless we lapse into savagery. It will be ac- 
quired as a logical result of the fact that the individual laborer, 
instead of being superfluous and easily spared, as is the case 
when labor is oversupplied, has become either indispensable or 
difficult to spare because of the scarcity of laborers. By volun- 
tary agreement in the free and open market he can then get his 
full share of the control of industry. 



CHAPTER XV 

ECONOMICAL USE OF LABOR ON LAND 

Product per acre and product per laborer. The economical 
use of land presents two somewhat distinct but closely related 
problems : first, the economical use of labor on land ; second, 
the economizing of land itself. The first problem is that of 
so managing labor on land as to get the maximum product per 
unit of labor ; the other is that of so handling the land as to 
get the maximum product per acre. In a country where there 
is an abundance of land still unused and of good quality, the 
first is the only problem of immediate importance. In an older 
and more densely populated country, where land is becoming 
scarce, the second problem rises to importance. Even in the 
latter case, however, the main problem is always that of getting 
the maximum product per unit of the population. It is this 
which will give the maximum average well-being for the pop- 
ulation. But if land is strictly limited and very scarce, a 
large product per acre is absolutely necessary in order that 
there may be the maximum product per unit of the population. 

What does "land" include ? In most economic discussions 
the word ^'land" is used to include all natural agents, — forests, 
waterfalls, minerals, and everything else provided by nature 
for man's occupation and use. But under our legal system the 
ownership of a piece of land or a section of the earth's surface 
carries with it the use of the air above it, the sunlight that falls 
upon it, the rain, the dew, and everything else that cannot be 
separated from it. In some cases this ownership includes the 
minerals that lie beneath the surface. 

Colonizing. The problem of getting the most out of these 
natural resources with the prevailing supply of labor is one of 

226 



ECONOMICAL USE OF LABOR ON LAND 227 

the most important of all questions of national economy. The 
problem of getting the maximum product per unit of labor has 
been discussed in the preceding chapters under such headings 
as The Division of Labor, The Use of Power, The Use of Capi- 
tal, and Forms of Business Organization. There are many other 
methods, however, by which the product per unit of labor may 
be increased. Among these must be mentioned that of terri- 
torial expansion of the population or the sending out of colo- 
nies. This is a means by which more land is made available 
for the existing population than would be the case if it did not 
expand or colonize. 

It is probably no accident that every great race has been a 
colonizing race. There is no reason to believe, however, that 
it was the colonization that made it a great race, rather than 
that the greatness of the race enabled it to colonize. A great 
race must be made up of vigorous and efficient people. Such 
people are likely to succeed wherever they go. They make suc- 
cessful colonists, for the simple reason that when they emigrate 
and come into competition with other races they are more than 
likely to succeed in that competition. Having great physical vigor 
and energy, a high degree of mentality, considerable knowledge 
of and control over the forces of nature, and a temperamental 
development that enables them to work together efficiently, 
they are very likely to succeed in competition with outlying 
races. If in addition to this they waste less of their energy in 
distrust and suspicion of one another, if they have a keener 
sense of justice and no disposition to sacrifice the interests of 
society for the weak and inefficient, such people may easily 
spread over outlying lands, buy them from the natives, and 
succeed by virtue of their superior mastery of the arts of pro- 
duction. On the other hand, the members of a weak race are 
not uniformly successful when they emigrate and come into 
contact with other peoples. Such individuals incline to stay at 
home, where they can protect themselves by special political 
and legal institutions against the competition of outside peoples. 
The surplus population, instead of moving out and colonizing 



228 PRINCIPLES OF NATIONAL ECONOMY 

those sections of the earth where its labor would be most pro- 
ductive, remains within the confines of its own country and 
tends to overpopulate that territory. 

Expanding and pent-up civilizations. This difference in the 
characteristics of the members of different races will explain 
two very different types of civilization, one of which may be 
called the expanding type and the other the pent-up type. 
Under the expanding type of civilization the people spread out. 
They go where the natural opportunities for the productive use 
of labor are greatest. They are vigorous and capable enough to 
be willing to take their chances anywhere in competition with 
members of any other race. Under the pent-up type of civili- 
zation the people incline to keep within the boundaries of their 
own country or their own neighborhoods, where they enjoy at 
least some protection from outside competition or have some 
little outward advantage to help to balance the disadvantages of 
their own individual weaknesses or inefficiency. A country 
populated by such people generally tends to become overpopu- 
lated and to maintain a very low standard of living. In such a 
country the death rate eventually rises to balance the birth 
rate, or else the birth rate falls to balance the death rate. 

Expanding the indoor industries. When the people of a coun- 
try are too far advanced in civilization to be willing to acquire 
new lands by military conquest or to force themselves as colo- 
nists upon other countries unwilling to receive them, and are 
therefore unable to acquire any new land, one of the most 
important of all questions is that of economizing the land al- 
ready in their possession. One way of accomplishing this is to 
turn from the industries that require much land in proportion 
to the product to those industries that require little land. A 
mechanically expert nation may turn to the manufacturing in- 
dustries, bringing the products of land from distant countries 
where land is still abundant, working them over in the factories 
at home, and selling the finished products again to other outside 
people. By this process a country can support a vast population 
for which its own land would not provide food enough. This 



ECONOMICAL USE OF LABOR ON LAND 229 

method, however, is always more or less hazardous because of 
the possibility of a cutting off of its sources of raw materials or 
of the market for its finished products. A country is in a much 
safer position if it can so utilize its land as to support its 
population from the products of its own soil. 

Making better use of soil. In most countries, especially in the 
United States, the soil itself is by far the greatest physical 
resource. The products of the soil exceed in value many times 
those of the mines and the fisheries. Besides, if the soil is 
properly treated it may continue producing its wealth and main- 
taining its population for indefinite periods of time. 

One of the first methods of securing a more economical use 
of the land of a country is that which is generally known as 
reclamation ; that is, the bringing into use of land hitherto unfit 
for cultivation. The methods of reclamation are determined 
chiefly by the kinds of waste land or the reasons why the 
land has been unfit for cultivation. These reasons are in the 
main as follows:^ 

r Too stony 
" Bad physical conditions -I Too wet 
I Too dry 



Causes of 



Waste Land] ^^^ chemical conditions j 



f Too much acid 
1 Too much alkali 



_ , . , ... f Bad taxation 
,Bad social conditions <^ „ , , . 

t 1 00 much speculation 

Causes of waste land. If all the land of a country were once 
brought under cultivation, there would be no way of economiz- 
ing it except by making each acre produce more. But this 
is a condition which has probably never been reached in any 
country, certainly not in the United States. Therefore we 
have first to consider the question of bringing waste lands 
into use. Let us assume that the country is all ^^ settled" ; that 
is, that the population has increased and spread until all the 
land which is sufficiently productive to attract cultivators has 

1 Compare the author's work, "Principles of Rural Economics," pp. 132 at seq. 
Ginn and Company, Boston. 



230 PRINCIPLES OF NATIONAL ECONOMY 

actually been appropriated. In this case the existence of waste 
land will be due to one or more of three causes : ( i ) bad physi- 
cal conditions, (2) bad chemical conditions, (3) bad poHtical 
conditions. 

Bad physical conditions. There are many physical conditions 
which might be described as bad, any of which would tend to 
make land unattractive to cultivators and therefore to cause it 
to go to waste. There are, however, three characteristic condi- 
tions which cause considerable quantities of land of three differ- 
ent types to go to waste. These are represented by the lands 
described above as (i) too stony, (2) too wet, (3) too dry. 

Stony land. In the North Atlantic states of the United States 
the first of these conditions is the most conspicuous of the causes 
of waste land ; that is, most of the waste land is too stony, 
though there are some swamps there also. Along the southern 
seaboard and the Gulf coast the second of these conditions is 
the most conspicuous ; that is, most of the waste land is too 
wet, though there are occasional patches of stony ground. But 
over a vast area in the Far West, comprising fully a third of the 
entire area of the United States, the land is too dry, and much 
of it goes to waste on that account. There is enough of this land 
to support an empire, were it not for the absence of the one 
missing factor, — water. The early settlers in the eastern half 
of this country found another condition which gave them a 
great deal of trouble, namely, the presence of forests which had 
to be cleared ; but this is not a condition which creates a prob- 
lem for the rural economist today. In fact it is now much 
more of a problem to preserve our forests than to find ways of 
clearing the land of them. 

Of the land which is now going to waste because of its rocky 
condition, much of it is so exceedingly rocky as to make it 
forever useless as plowland or even for pasture. It would cost 
so much to clear it of stones that one could never hope to secure 
sufficient returns to repay the cost. Such land, however, need 
not go to waste. It is our natural forest land. With the growth 
of population the demand for timber continues to increase, and 



ECONOMICAL USE OF LABOR ON LAND 231 

with the clearing of the virgin forests the supply continues to 
diminish. The time is not far distant when the products of the 
forest will be in such demand as to make even the rockiest of 
our hill lands valuable, provided they have been allowed to grow 
up to trees. 

This does not mean that these rocky hills are better for trees 
than are the more level and tillable lands of the valleys and 
plains. But the latter lands can be used for the growing of 
field and garden crops, whereas the rocky hills cannot. It is a 
wise economy, therefore, to devote these hills to the one purpose 
for which they are suited, reserving the tillable lands for other 
purposes. Besides the timber, these rocky and semimountain- 
ous lands are of some value as deer parks and game preserves. 
The supply of venison and other game which such lands will 
furnish, while of small value in comparison with the products 
of rich pastures devoted to the growing of domestic animals, is 
not a matter to be despised, especially when we consider that it 
produces itself without cost in the way of labor or care. 

One difficulty in the way of the full utilization of land of 
this description for purposes of forestry is the slowness with 
which returns come in. It takes at least thirty years, more 
frequently fifty years, for a tree to grow to a usable size. So 
long a period of waiting is unattractive to the average individ- 
ual, partly because of the limited span of human life and partly 
because of the shortness of human foresight. Another difficulty 
lies in the fact that the work of reforesting the rocky lands, to 
be effective, must be carried out on a considerable scale. This 
seems to call naturally for state and government enterprise. 
Since governments do not need to count on a natural death, 
they need not be deterred by the long period of waiting involved 
in forestry. A half century or even a century is not too long for 
a government to wait for returns, provided they are desirable. 

The reclamation of stony land in this country has hitherto 
been mainly a matter of private enterprise. The individual 
farmer on such land has with his own labor, or at least under his 
own management, done the work of clearing. 



232 PRINCIPLES OF NATIONAL ECONOMY 

Wet land. The problem of reclaiming wet land has attracted 
more public attention, and much more has been done by public 
enterprise in this direction than in the reclaiming of stony land. 
There are several reasons for this. In the first place, drainage 
operations sometimes have to be carried on over a considerable 
area in order to find a suitable outlet. These large areas are 
frequently beyond the control of any individual or firm, and in 
some cases they extend beyond the state boundaries, so that 
two or more states are involved in the project. In such cases 
the enterprise can be successfully carried out only under state 
or national management. Another reason for the public interest 
in this problem is that, in addition to the economic value of the 
land that is reclaimed, there is the positive menace to health of 
unreclaimed swamp land. Drainage may, therefore, be a matter 
of public interest for sanitary reasons alone. 

The appeal to the imagination which such enterprises make 
is not to be ignored. Such lands are usually exceedingly fertile 
when drained. They have for ages received the washings from 
the higher lands surrounding them and are prevented from 
becoming highly fertile only by the excess of water. Anyone 
who has lived on or traveled across lands of this kind and seen 
what remarkable results have accrued from successful drainage 
operations must have been stirred to some degree of enthusiasm. 
Much of the most fertile land of England, especially in the 
eastern counties, was at one time fen, or swamp land. The 
drainage and reclamation of these lands have to be counted 
among the greatest achievements of English genius. In the 
process of nation building they would have to be named among 
the chief contributors to the greatness of the British nation. 

The case of Holland. Even more striking results are found 
in Holland, much of whose land has been reclaimed by very 
laborious methods. In fact, a great deal of the most fertile 
land of Holland today lies below the level of the sea and is 
made available for human habitation and the support of human 
life by extensive drainage operations supplemented by pumping 
on a large scale. One of the most interesting examples is that 



ECONOMICAL USE OF LABOR ON LAND 233 

of what was formerly Haarlem Lake. Before 1839 this was a 
body of water covering approximately forty-two thousand acres 
at an average depth of a little over thirteen feet. In fact, con- 
siderable traffic by boat was maintained on this lake among the 
towns situated on its border. Before deciding to drain the lake 
it was, therefore, necessary to provide a substitute in the way of 
transportation facilities between these towns. Accordingly a 
canal was built around the border of the lake, having a total 
length of thirty-eight miles, a depth of nine feet, and a width of 
a hundred and fifteen to a hundred and thirty feet. This not 
only provided for traffic by boat among the towns that had 
grown up but it was high enough to drain by gravitation into 
the sea. The water from the lake, however, had to be lifted into 
this canal, and this was done by three gigantic plants, each one 
capable of pumping a million tons in twenty-five and one-half 
hours. It took three years of constant pumping to empty the 
lake, and the pumping plants have had to be kept intact ever 
since in order to safeguard against flooding. As soon as the lake 
was pumped dry the sale of land began, and the total price of 
$3,760,000 was realized. This was not enough to pay the cost 
of reclamation ; but there were other advantages, such as the 
improvement in health and the safeguarding of the towns 
around its border against high water, from which they had 
suffered several times before. 

Swamps in the United States. In the United States it is esti- 
mated that there are somewhere between sixty and eighty 
million acres of swamp land capable of ultimate reclamation. 
These are widely distributed, but there are several special sec- 
tions where these lands are located in considerable quantities : 
first, the Atlantic Coastal Plain (especially from Virginia to 
Florida); second, the lower Mississippi Valley; third, the 
northern halves of the three states of Michigan, Wisconsin, and 
Minnesota. There are numerous other small areas of consid- 
erable importance in themselves, such as the Sacramento and 
San Joaquin River valleys of central California. When all these 
swamp lands are drained and brought under cultivation it is 



234 PRINCIPLES OF NATIONAL ECONOMY 

not improbable that they will easily support two million fami- 
lies. Allowing five persons to the family, this will add ten mil- 
lion to the number of people who can be supported within the 
present boundaries of the United States. 

In addition to the reclamation of swamp land (that is, of 
land too wet for any kind of cultivation), there is the vast 
problem of draining land which is capable of cultivation in 
ordinary weather but on which crops are subject to injury by 
wet weather. This can hardly be called reclamation in the 
strictest sense, and yet it is of great economic importance in 
that it adds greatly to the productivity of the land already 
under cultivation or capable of cultivation. Throughout the 
greater part of the territory east of the Missouri and Mississippi 
Rivers crops probably suffer in the long run more from wet than 
from dry weather. The irrigation of these lands is, therefore, 
not considered of immediate importance, though as a safeguard 
against occasional spells of dry weather it may ultimately be 
considered an economic possibility. Drainage, however, as a 
means of preventing the evil effects of spells of wet weather has 
since 1870 had considerable development and is certain to have 
more in the future. 

Dry land. The problem of reclaiming dry land has received 
even more public attention in this country and throughout the 
world than that of reclaiming either stony or wet land. One 
obvious reason is that there is much more dry than wet land in 
this country and in the world. More than half of the land of 
the world which would otherwise be tillable is either unculti- 
vated or very meagerly cultivated because of the scarcity of 
moisture. Fully half of the land of this country otherwise till- 
able suffers also from lack of moisture. Relatively speaking, 
it is generally assumed that the ninety-eighth meridian comes 
as near being the dividing line between the humid and the arid 
sections of the country as any line that can be selected. 

The distance along the ninety-eighth meridian from the Ca- 
nadian border to the Rio Grande is approximately fifteen hun- 
dred miles. Aside from the lack of water this land would cross 



ECONOMICAL USE OF LABOR ON LAND 235 

practically no waste land ; that is to say, the land is smooth, is 
free from stones, and possesses a deep soil rich in plant food. 
These conditions continue westward as far as the Rocky Moun- 
tains, an average distance of more than two hundred miles. The 
acreage included in this strip is slightly greater than that of 
France and almost equal to that of the former German Empire. 
Yet the lack of water prevents it and will continue to prevent it 
from supporting a dense population unless that difficulty can 
be overcome. 

There are two recognized methods of dealing with the prob- 
lem of dry land. The first goes under the name of dry farming, 
which consists in the economizing and conserving of the lim- 
ited moisture supplied by the rains and the dews ; the other is 
irrigation, which consists in conducting water from the moun- 
tain streams and distributing it over the tillable lands of the 
valleys and the plains. 

Dry farming. While irrigation is the more spectacular method 
of the two and, wherever streams are available, is vastly to be 
preferred, nevertheless it is limited in its scope and has never 
been used so widely as the other method. Much of the agricul- 
ture of the world has always been carried on under what we 
call in this country conditions of dry farming; that is, under 
conditions where the farmer's chief problem was that of econ- 
omizing, conserving, and utilizing to the fullest extent a very 
limited supply of moisture. The methods of dry farming fall 
in turn into two main classes: first, those that prevent the 
waste of the existing supply of moisture ; second, the planting 
of crops that are adapted to dry soils (that is, crops that will 
mature with a minimum supply of moisture). There are in 
turn two methods of preventing the waste of the existing supply 
of moisture : one is to prevent the rainfall from running away in 
the streams by enabling it to soak into the ground as quickly 
and easily as possible. Many of the rains of these arid regions 
come in the form of torrential showers. If the surface is hard 
and baked, much of this rain will run away in the streams and 
never soak into the soil at all. If, however, the soil is thoroughly 



236 PRINCIPLES OF NATIONAL ECONOMY 

broken and loosened, it soaks in much more rapidly, and much 
less of it, therefore, will be lost in the streams. The other 
method is to prevent, as far as possible, the loss by evaporation. 
In the intense heat of the summer, especially if the winds are 
very deficient in moisture, this occasions considerable loss. For- 
tunately the sanie method which will enable the rain to sink 
readily into the soil tends to prevent or reduce to a minimum 
the loss by evaporation ; that is, if the surface of the soil is kept 
broken and loose the moisture from below does not rise by 
capillarity near enough to the surface to come in direct con- 
tact with the winds — in other words, it remains below the 
surface where it may be reached by the roots of the plants. 

Drought-resisting crops. The selection of drought-resisting 
crops contains many possibilities and appeals to the imagina- 
tion, especially^ because of the element of discovery and adven- 
ture which it involves. As suggested above, the greater part of 
the surface of the earth is dry : the vast steppes of central Asia, 
the greater portion of Africa (practically all of it, in fact, ex- 
cept the great Congo Basin), and all of South America except 
the great Amazon Valley are dry countries. The exploration of 
these vast areas for the discovery of plants that flourish there 
and that may be of use to man has only begun. No one can 
tell what possibilities may lie hidden there. Already, however, 
a beginning has been made, and a number of drought-resisting 
crops have been introduced^ including some near relatives of 
wheat and various sorghums, sunflowers, etc. No one can yet 
say how far a combination of these methods of saving the mois- 
ture and introducing drought-resisting plants may enable us 
to utilize effectively the vast dry areas of this country. One 
can at least say, however, that there is a possibility that 
sometime the greater part of our Far West will be growing crops 
of some kind. 

Irrigation. While the methods of dry farming are historically 
quite as old as the methods of irrigation and have been carried 
on over much wider areas, still public discussion of irrigation is 
much older in this country than is that of dry farming, partly, 



ECONOMICAL USE OF LABOR ON LAND 237 

perhaps, because, as suggested above, where water is available 
for irrigation it represents undoubtedly a very much more effec- 
tive method of reclamation than does dry farming. Since the 
very earliest settlements of our Far West, irrigation enterprises 
have been carried on either on a small or on a large scale. In fact 
the prehistoric inhabitants of some sections of our Far West 
made use of it. The early Spanish missionaries also constructed 
irrigation works around their missions. The first development of 
irrigation on a comprehensive scale, however, was undertaken 
by the Mormons, immediately after the founding of their colony 
on the Great Salt Lake in 1849. Having chosen to abide in what 
to all appearances was a desert, they were compelled by the very 
necessities of existence to put water upon the land in order to 
provide themselves with subsistence. Under the spur of this 
necessity they worked with an energy and intelligence that have 
seldom been equaled. The prosperity of the Mormon com- 
munity is based primarily on the irrigation ditch. The second 
attempt on a comprehensive scale was at Greeley, Colorado, 
where the cooperative principle was applied, though the coop- 
erators were not held together by a common religious belief. 
Somewhat later^ and partly as the result of the examples of 
Salt Lake City and Greeley, Colorado, an era of speculation in 
irrigated lands developed, especially in California. One writer 
has said, "Where Utah and Colorado depended only upon their 
hands and teams for the building of irrigation works, California 
issued stocks and bonds and so mortgaged its future."^ That 
is to say, instead of the prospective farmers' taking their own 
teams and with their own labor building their own ditches, 
money was raised by the sale of bonds, and with this money 
men were hired to build the dams and dig the ditches. Under 
this method a number of irrigation works were built and, where 
properly built^ served the needs of agriculture; but in many 
cases the people who had put their money into the shares of 
the irrigation companies never got it back. So frequently was 

lEIwood Mead, "Rise and Future of Irrigation in the United States," in 
Yearbook of the United States Department of Agriculture, 1899. 



238 PRINCIPLES OF NATIONAL ECONOMY 

this the case that it became difficult to raise money by this 
method. The next stage in the development of irrigation policy 
was the constructing of irrigation systems by state or govern- 
ment enterprise. The reclamation policy of the Federal gov- 
ernment is characteristic of this method. Under this policy a 
considerable area is selected as suitable for irrigation on account 
of its contour, its proximity to streams, and the ease of dis- 
tributing water by gravitation. The whole project is surveyed, 
the dams and ditches are built, and then the land is opened 
to settlement by actual farmers, each farmer paying his pro- 
rata share of the actual cost of the irrigation system. Even 
under this method, however, it has frequently been the case 
that the cost of irrigation was so great that the farmer had to 
pay rather more than his land was worth after it was irrigated. 
Eventually, however, when the demand for agricultural prod- 
ucts increases with our growing population, and the price of ag- 
ricultural products rises, the value of the land will undoubtedly 
increase sufficiently to cover the cost of construction. 

Bad chemical conditions. Comparatively little public atten- 
tion has been given to the reclamation of lands that are unused 
because of bad chemical conditions. A great deal of the land 
of the eastern third of the United States contains too much acid 
and requires constant applications of lime. This, however, has 
never been considered a subject for public enterprise. The 
individual farmer can probably apply lime to his individual 
farm quite as efficiently as it could be applied by any large com- 
pany or the state or the nation. The problem of alkali land is 
a little more baffling. Where most of the moisture that sinks 
into the soil never runs away, but rises to the surface and is 
carried away by evaporation, the soluble salts are never leached 
out, but come to the surface and are left when the water evapo- 
rates. In some cases the first few inches of surface become so 
impregnated as to prevent the growth of useful plants. In 
general the methods of dealing with alkali land are as easily 
within the reach of the average farmer as of the state or nation. 
In mild cases deep plowing, by means of which the surface 



ECONOMICAL USE OF LABOR ON LAND 239 

where the alkali is too abundant is turned under and soil suit- 
able for plant growth is thrown onto the surface, is sufficient. 
If in addition to this the surface is kept broken so that the 
process of evaporation is retarded, it is unlikely that another 
crust of alkali will form on the top. In very bad cases, however, 
it appears that nothing but underdrainage will cure the diffi- 
culty ; that is, where the water containing considerable quanti- 
ties of alkali in solution is drained off and not allowed to come 
to the surface and evaporate, the cure is permanent. Something 
can also be done by introducing crops which tolerate consider- 
able quantities of alkali. The sugar beet has been found to be 
one of the most tolerant of all our crops toward alkaHne condi- 
tions. Experiments have been made with Australian saltbushes. 
Alfalfa is mildly tolerant and is a prodigiously profitable crop 
on certain lands that are mildly alkaline. 

Bad political conditions. Under bad political conditions we 
might include a good many things that would be subjects of 
controversy. There is no doubt, however, that a repressive 
system of taxation or a condition of government which would 
make farmers uncertain as to the results of their farming 
would have a powerful influence in causing land to go to waste. 
In the earliest settlement of our Western lands the Federal 
government's purpose was to replenish its treasury from land 
sales and to pay off its national debt. So long as this policy 
was followed strictly there was little inducement to actual set- 
tlement, but much inducement to speculation in Western lands ; 
that is, they were bought up in considerable tracts by men who 
had considerable funds of money to invest. Gradually, how- 
ever, a different policy was adopted, culminating in the Home- 
stead Act of 1862, under which land was given without money 
and without price to any qualified settler who would live on it 
and cultivate it for five years. This method undoubtedly en- 
couraged the rapid settlement of our Western lands much more 
effectually than the earlier policy had done. An unstable local 
government in which the farmer's property is not adequately 
protected against town marauders or other depredators is one 



240 PRINCIPLES OF NATIONAL ECONOMY 

of the most effective causes of waste land. This is especially- 
true of small holders, who could, if they were properly encour- 
aged, grow a considerable proportion of their subsistence in 
their own gardens. If one's garden, however, is not safe and is 
liable to be despoiled, or its products stolen, the would-be gar- 
dener has little encouragement to maintain a garden. It is well 
understood that one of the greatest obstacles in the way of 
sheep husbandry in this country is the depredation of the town 
dog, which could easily be eliminated if the public had the 
intelligence to deal with it in a vigorous manner. 



CHAPTER XVI 
ECONOMIZING LAND 

In a new country where land is abundant and labor scarce 
the problem of economizing land is never acute. The tendency- 
is to economize labor to the maximum and to use land merely 
as a means to that end. This frequently results in a wasteful 
use of land. In old and thickly settled countries, however, the 
problem of economizing land tends to become almost as impor- 
tant as that of economizing labor. In fact, in densely overpop- 
ulated countries men are sometimes regarded as the cheapest 
and land as the most precious of national assets. Even where 
men are properly regarded as the greatest asset, the problem 
of conserving and economizing land or natural resources is a 
very serious one. 

Land, however, has many properties, and some of these prop- 
erties do not need to be economized, either because they cannot 
be exhausted or because they are not scarce. The following 
classification shows the properties that need to be economized. 

C I. Location 

A. Noneconomic -| ' ^ . B. Economic i 2. Fertility 

I 2. Extension ,,. , 

1 3. Minerals 

Noneconomic properties of land. Some of the physical and 

geometric properties of land which are the most fundamental 

are not the most important from an economic point of view. 

The solidity of the earth which serves to support our weight, 

and that of the buildings which we erect and the plants which 

we grow, is of course essential to our very existence. It is not 

a matter of the greatest economic interest, however, because it 

is not so scarce as some other properties. Rocky or desert land, 

of which there is an abundance, furnishes support as well as 

241 



242 PRINCIPLES OF NATIONAL ECONOMY 

fertile land. The quality of extension (that is, superficial area) 
is also essential. It is this which enables us to catch and utilize 
the sun's rays, the rain, and the dew. It is this which provides 
room for plants to grow, to spread their roots to the soil and 
their leaves to the air. It is this which furnishes space for the 
erection of buildings and the carrying on of all activities. This 
quality of extension, however, is possessed by sterile as well 
as by fertile land, and by land which is badly located as well as 
by that which is well located. 

Economic properties. Location may also be said to be a 
geometric property of land. It is a matter of great economic 
importance because there is such a scarcity of land in the best 
locations. By location is meant proximity and convenience of 
access to markets, roads, schools, scenery, and various other 
desirable things. Some land is greatly superior to other land in 
this respect, and this creates a great difference in the desirabil- 
ity of different lands. Location is the chief, almost the only 
factor in determining the value of urban land. In a place where 
multitudes of people desire to live, land is necessarily scarce, 
but the scarcity is that of land well located for urban pur- 
poses ; that is, for business or for the dwellings of those who 
have to live within reach of the business establishments. More- 
over, the differences in the value of lands within a city are due 
almost wholly to differences in location. In agricultural com- 
munities location is a factor, but not the only nor the most 
important factor, in determining land values. Nearness to 
markets or to railroads, the character of the wagon roads, acces- 
sibility to schools and other social advantages, count for much ; 
but the character of the soil and the subsoil, the climate, the 
moisture, and the other factors which determine plant growth 
count far more. All these factors which promote plant growth 
may be grouped under the name " fertility." In that case we 
may say that from an economic point of view location and 
fertility are the most important properties of agricultural land. 

Good location saves transportation. When we look for the 
reason why location is a matter of such importance we must 



ECONOMIZING LAND 243 

recall the fact that man's chief work, on the physical side, is 
the moving of materials. It is this which requires power ; and 
power is costly, whether it be generated in the human body and 
exercised through the muscles, or whether it be developed in the 
bodies of animals or through mechanical agents. One very 
important phase of the work of moving materials is that of 
marketing products. The nearer a body of land is to a market 
and the better the means of transportation, the less labor and 
power it takes to get its products to market. On land which is 
well located with respect to markets it is therefore possible to 
utilize labor more efficiently than on land which is badly located. 

It is also costly to move man himself. It is therefore advan- 
tageous that he should live in close proximity to his work. If 
he lives far away the cost of transportation is greater and the 
labor force of the community is less efficiently applied than if 
he lives close by. Even though the trolley fare is the same for 
a long distance as for a short distance, transportation costs 
more over the long distance. In the first place, it takes a longer 
time and the passenger loses that time. In the second place, it 
costs the transportation company more, and that extra cost 
must ultimately reduce the total productive power of the com- 
munity. The extra labor required to transport passengers a 
longer distance might otherwise be used in other lines of pro- 
duction. However, the sheer scarcity of land, both for business 
and for residence purposes, forces the population to spread and 
makes long-distance transportation necessary, however costly 
it may be. 

In proportion as transportation can be cheapened, in that 
proportion will questions of location become of less importance 
from the standpoint of production. From the standpoint of 
consumption or direct enjoyment cheapened transportation 
would apparently make little difference. Certain neighbor- 
hoods, because of neighbors, scenery, fashion, and a variety of 
reasons, would still be preferred to others. If one could imagine 
costless transportation, such as is pictured in the Arabian 
Nights by the story of the magic rug, on which one could be 



244 PRINCIPLES OF NATIONAL ECONOMY 

instantly transported to any distance, one location would be as 
desirable for production as another; that is to say, if there 
were no difference between two pieces of land in fertility or in 
anything else except location, they would be equally desirable. 
It would cost no more to transport products to market or men 
to and from their work in one case than in another. So far as 
location is concerned there would be no scarcity of land until 
all the unoccupied portions of the earth were occupied and uti- 
lized. In short, such a perfect system of transportation would 
vastly increase our available supply of unsalable land. 

While it is obvious that no such instantaneous and costless 
system of transportation will ever be devised, it is equally obvi- 
ous that the more nearly we can approach that system the more 
land we shall have available for all sorts of purposes. It is the 
superiority of modern as compared with earlier means of trans- 
portation which makes possible those vast aggregations of 
people known as cities. They can draw their supplies from 
greater distances and in greater abundance than would be possi- 
ble with less efficient means of transportation. Ancient cities 
that were situated on navigable rivers or on the seashore had 
the advantage of water transportation, which, even before 
the days of steamships, was fairly cheap and efficient. Non- 
perishable products, such as wheat, could then and can still 
be transported long distances in sailing vessels at low cost. 
Consequently, where water transportation was possible, cities 
of considerable size grew up long before the days of steam 
railways. But inland cities, such as many of those which 
dot the maps of every progressive country, would have been 
an impossibility. 

Access to food supplies. It seems to be a general rule, apply- 
ing to all forms of life, that numbers depend upon food supply. 
Where food is abundant, numbers may be large. Since food 
comes ultimately from the soil, the capacity of the soil to pro- 
duce food places a limit upon numbers. One of two things must, 
of course, follow: a large population must either spread over 
wide areas of land in order to find sufficient food^ or it must 



ECONOMIZING LAND 245 

transport food from these wide areas where it is produced to the 
densely populated centers where the people live. Certain birds 
reverse this process and manage to live a part of the time in 
large flocks and transport themselves to and from their feeding- 
grounds. If they are strong fliers, as were the wild pigeons 
which formerly inhabited this continent, they may feed over 
large areas and return to their roosting-places at night. It was 
their remarkable powers of flight which enabled such vast num- 
bers to roost in the same locality ; otherwise they would have 
been compelled to break up into smaller flocks in order to live 
nearer their feeding-grounds. The same law seems to apply to 
human flocks. If we were not able to transport food and other 
supplies such long distances our large cities would be compelled 
to scatter and we should have to build many smaller cities, or 
else live as scattered families, in order to be nearer the sources 
of supply. Even with our present means of transportation there 
are limits beyond which it does not seem to be advantageous to 
concentrate our population. Consequently we find many small 
cities and towns whose people live by the indoor industries. 
They are nearer sources of supplies of various kinds, besides 
having more room for their own industries. 

Increasing floor space by erecting tall buildings. The neces- 
sity for room for the indoor industries can be supplied in part 
by tall buildings. Floor space can be increased by as many 
stories as can be built, subtracting, of course, the space neces- 
sary for elevators, stairways, airshafts, etc. But after a very 
moderate height is reached, the cost of construction increases 
more than in proportion to the added floor space. To add one 
more story on the top of a tall building requires stronger walls 
all the way down and also a better foundation. Besides, it costs 
more to carry the building materials to the greater height and 
the cost of elevator service to the top floor is somewhat higher 
than for lower floors. A twenty-story building is of a very 
moderate height in some of our large cities, where land is very 
scarce, but even this height would be absolutely unprofitable in 
a town where there was plenty of room on the ground. 



246 PRINCIPLES OF NATIONAL ECONOMY 

Streets. The traffic needs of a busy population also make 
demands upon land for streets. Much the same methods are 
used to economize land for street purposes as for building pur- 
poses. The building of subways, sub-subways, elevated roads, 
and viaducts is a familiar method. It used to be suggested in a 
jocular way that a road through the air would also economize 
land. Flying machines may eventually transform that joke into 
a real economy. Superior pavements for the support of larger 
and more powerful vehicles will also economize road space 
somewhat by permitting more traffic to be carried on over a 
street of given width. 

Economizing agricultural land. These methods of economiz- 
ing land are suited to urban rather than to rural districts. 
Space is required in agriculture, as suggested above, for the 
utilization of solar energy, soil, and moisture in plant growth. 
^'Two-story farming," as Professor J. Russell Smith calls it, 
consists in growing tree crops and ground crops underneath the 
trees. Some space can be saved in this way, where there is 
plenty of sunlight, soil, and moisture, but not very much. It 
enables the plants to utilize sunlight a little more effectively, 
perhaps, because the low-growing plants can use that which 
filters through the foliage of the trees ; but if the trees use too 
much (that is, if the low-growing plants are shaded too much) 
their development is retarded. There may be some economy of 
soil fertility also if the trees send their roots deeper than the 
smaller plants. In that case the two kinds of growth do not 
compete directly for soil fertility. Where an abundance of 
artificial fertilizer can be used and water for irrigation is 
plentiful, an adequate supply of plant food and moisture can 
be supplied to both kinds of vegetation. In this case the limit- 
ing factor is sunlight. This is a factor for which we have not 
yet found a good substitute. Therefore we must continue to 
spread our cultivation over wider areas if we are to support 
larger populations. 

Intensive cultivation. There are two somewhat distinct 
methods of getting a larger product from the land already under 



ECONOMIZING LAND 247 

cultivation. One is the more intensive cultivation of existing 
crops ; the other is the substitution of heavy-yielding for light- 
yielding crops. The chief difficulty with the method of inten- 
sive cultivation is, of course, the well-known law of diminishing 
returns. This has already been discussed in Chapter IX and will 
be treated with greater detail in Chapters XIV and XXXIII, 
It will be sufficient at this point to remark that in order to 
double the yield of any given crop under ordinary conditions it 
will require more than double amounts of labor or capital in the 
cultivation of the land ; or, in more general terms, to get an 
increased product from land requires a more than proportion- 
ally increased application of labor and capital to its cultivation. 

Intensive farming. "Two-story farming" is only one phase 
of intensive agriculture, which may be defined as the use of 
large quantities of labor and capital in the cultivation of rela- 
tively small areas of land in order to get large crops per unit 
of land ; that is, large crops per acre. As pointed out in 
Chapter XV extreme efforts to increase the productivity of land 
tend to decrease the productivity of labor ; that is, to reduce the 
product per unit of labor. When a country becomes thickly 
populated, however, if its people are unwilling to migrate to 
countries where land is abundant the problem of economizing 
land becomes one of great importance. So long as it can find 
markets for the products of indoor industries, it may bring the 
products of the soil from less densely populated countries. 
When these outside markets cease to expand, and it is therefore 
compelled to live more and more from the products of its own 
soil, it must perforce get more and more out of its soil. Inten- 
sive agriculture is then forced upon it. Yet as a matter of 
observed fact intensive agriculture the world over is asso- 
ciated with the poverty of those who actually work on the soil, 
though it may be also associated with the riches of those who 
own the soil. 

Intensive farming and poverty. This impoverishment of the 
worker on the soil where the latter is intensively cultivated is 
not absolutely necessary except where the intensive cultivation 



248 PRINCIPLES OF NATIONAL ECONOMY 

is carried to extremes. It is a necessary result, however, if the 
attempt is made to wrest a larger crop from the soil by the mere 
application of more and more labor to each acre of land. The 
yield is found not to increase in proportion as the labor is in- 
creased, which necessarily means a smaller product per man. 
But if more capital is used, as well as more labor, particularly if 
better methods of cultivation are adopted and carried out by 
means of the larger use of capital, increasing yields per acre 
may be secured for a time and up to a certain point without any 
diminution of yield per unit of labor. By using more power and 
larger tools in order to plow deeper and prepare a better seed 
bed, a given amount of labor may cultivate the same acreage of 
land as before and yet get a larger yield per acre. This would 
also give a larger yield per man. Again, by cultivating a slightly 
smaller acreage and cultivating it more thoroughly by means of 
better tools, the same product per man may be secured and a 
somewhat larger population may be supported without any 
diminution in average income. But experience shows that 
wherever even this process is carried too far a smaller product 
per man, and consequent poverty, will be the result. 

A seeming exception to this rule (but it is only a seeming 
exception) is found when a few cultivators turn from the grow- 
ing of staple crops to the growing of high-priced specialties. 
Only a few can do this, for the reason that the market is very 
limited. The mass of the farming population must grow the 
crops which feed and clothe the people. Those who do succeed 
in the production of agricultural specialties may manage to 
make good incomes from very small plots of land. This does 
not prove by any means that the growers of wheat or beef 
could do likewise. So long as consumers demand wheat bread 
and beef as parts of a steady diet, they must draw their sub-' 
sistence from considerable areas, for these products can be 
most economically produced by what are commonly known as 
extensive methods of cultivation. 

The other possibility^ — that of substituting heavy-yielding 
for light-yielding crops — may be considered as a separate 



ECONOMIZING LAND 249 

method or as a special application of the method of intensive 
cultivation. The simple fact is that some crops, such as wheat, 
do not respond very vigorously to intensive cultivation, whereas 
other crops, such as Indian com, potatoes, sugar beets, and 
many of the standard vegetables, respond much more vigor- 
ously. In other words, in the growing of a crop of wheat it is 
impossible, except by the most laborious and expensive methods, 
to quadruple the average yield of fifteen bushels to the acre, 
and there is no authentic case on record up to the present 
moment to show that a hundred bushels of wheat have ever 
been grown on an acre. With the potato, however, the limit is 
not very well marked. While the average crop is less than a 
hundred bushels to the acre, crops of five hundred bushels 
are by no means uncommon, and special crops of a thousand 
bushels or more to the acre are well authenticated. 

Kinds of food that require wide acreage. It happens that two 
of our standard articles of diet — namely, wheat flour and beef — 
are most economically grown under conditions of extensive cul- 
tivation. This explains, doubtless, why wheat tends to be a 
frontier crop, and beef likewise. Thirty bushels of wheat to 
the acre are a very good yield even under intensive cultivation, 
and are about twice the average yield in this country ; but sixty 
bushels of corn to the acre are quite as easily produced as thirty 
bushels of wheat. The food value of sixty bushels of corn is 
almost double that of thirty bushels of wheat. According to 
Atwater's tables it is 1.86 times as great. Under conditions of 
fairly good cultivation, therefore, 1.86 times as many people 
could be supported on corn as on wheat, assuming that the 
land in question is equally suitable for either crop. The great 
advantage of wheat, however, is that it stands transportation 
better than corn, and also that power-driven machinery can be 
used a little more effectively in growing and harvesting it. So 
long as there are vast areas of frontier lands available as a 
source of food it will continue to be economical to make use of 
them, — in other words, it will continue to be economical to con- 
sume wheat flour, — but as our population increases, corn tends 



250 PRINCIPLES OF NATIONAL ECONOMY 

to crowd out wheat and the Corn Belt to spread at the expense 
of the Wheat Belt. This is Hmited, however, by the fact that 
wheat will grow in drier and, especially, in colder land than 
corn. There is much good wheat land that will scarcely grow 
corn at all. Such land will, of course, continue to grow wheat 
or some other drought-resisting or cold-resisting crop. 

The yield of an acre of beans under conditions or fair culti- 
vation is equal in food value to 1.29 times that of wheat, 
whereas under conditions of fair cultivation an acre of potatoes 
yields 2.06 times the food value of an acre of wheat, and 
the sweet potato, on land and under a climate suitable for its 
cultivation, yields 4.82 times the food value of an acre of 
wheat. It is obvious, therefore, that when the arid regions 
which now supply wheat to the densely populated areas of the 
world fail to be adequate, much more food can be secured from 
the humid regions and much more life supported if the people 
will consent to consume a little less of the light-yielding and a 
little more of the heavy-yielding crops. 

Beef, like wheat, is an economical form of food so long as an 
adequate supply can be secured from what would otherwise be 
waste land. In other words, so long as there are arid regions 
unsuitable for anything but pasturage, and so long as these dry 
pastures can supply us with an adequate quantity of beef, it 
will be economical to continue consuming beef as a standard 
article of diet; but when beef from this source proves inade- 
quate, it will be very expensive to consume beef grown on land 
which would yield vastly more food if devoted to other crops. 
In fact, an acre of good corn land devoted to pasturage and 
beef-growing yields less than one tenth as much food value as 
the same acre would if devoted to growing corn. 

Turning to heavy-yielding crops. If people would change 
their habits of consumption and consume products which could 
be economically produced under intensive methods, or products 
which are capable of yielding large quantities of food per acre, 
much land could be saved; in other words, a much larger 
population could be supported from a given area. 



ECONOMIZING LAND 



251 



The following table shows the estimated power of an acre 
of land under good cultivation — but not the most intensive 
cultivation — to produce food of different kinds : 



Entire wheat flour . . . 
Native beef (as purchased) 
Mutton (as purchased) . 

Whole milk 

Corn meal (unbolted) 

Oatmeal 

Rice 

Rye meal as flour . . . 

Beans 

Potatoes 

Sweet potatoes .... 



Food Value 


Pounds per 


PER Pound 


Acre (Good 


IN Calories' 


Yield) 


1660 


1,800 


1 130 


200 


1275 


250 


325 


4,000 


1550 


3,600 


i860 


1,800 


1630 


2,400 


1630 


1,800 


1590 


2,400 


325 


24,000 


480 


30,000 



Calories 
PER Acre 



2,988,000 

226,000 

318,750 

1,300,000 

5,580,000 

3,348,000 

3,912,000 

2,934,000 

3,8 1 6,000 

7,800,000 

14,400,000 



Ratio to 

Wheat as Basis 

(per cent) 



100 

7 
II 

43 
186 
112 

131 

98 

129 

260 

482 



Of course there are elements of food value other than the 
heat-producing elements, but this table is enough to indicate 
that some economy of land could be effected by consuming 
other and more heavy-yielding crops than wheat and beef. 
Even these economies of land, however, might be gained by a 
less economical use of labor. While wheat and beef require 
considerable areas of land for their most economical produc- 
tion, they can be produced with comparatively small quantities 
of labor where the conditions are right. On our Western wheat 
farms, for example, where powerful machinery can be used, a 
small number of men can grow and harvest a very large acreage 
of wheat. On our Western cattle ranges also a small number of 
men can care for large numbers of cattle pasturing over very 
wide areas. If we did not have land enough for these purposes 
and had to support a growing population from our own soil, 
potatoes, sweet potatoes, corn, beans, milk, and milk prod- 
ucts in the form of butter and cheese would support many 
more people than could be supported on wheat and beef. We 

iprom Bulletin 28, United States Department of Agriculture, Office of Ex- 
periment Stations. Government Printing Office, 1896. 



2 52 PRINCIPLES OF NATIONAL ECONOMY 

must bear in mind also that vast areas comprising more than 
half the land surface of the globe are too dry for anything but 
grazing. Their only possible food product is and will continue 
to be meat. Considerable quantities of reindeer meat can also, 
it is now believed^ be grown in the far-northern regions of 
America, Europe, and Asia. 

The banana and the date. Certain tropical countries have 
great advantages in the way of food production on small areas. 
Concerning the banana Humboldt wrote: "I doubt if there 
exists another plant on the globe, which, on a small space of 
ground, can produce so considerable a mass of nourishment. 
. . . The product of bananas is to that of wheat as 133 : i, to that 
of potatoes as 44:1." In Arabia and northern Africa the date 
is very prolific and in favorable locations produces large quan- 
tities of food.^ 

Turning to the indoor industries. It is not likely to be 
repeated too often that the favorite method of economizing 
land and supporting a large population is to give up trying to be 
physically self-supporting and try to become commercially self- 
supporting. By being physically self-supporting is meant pro- 
ducing from our own soil all or practically all that we need. 
By becoming commercially self-supporting is meant bringing 
in the products of the soil from other countries, selling to those 
countries in return the products of the mines and the indoor 
industries. The products of the indoor industries may them- 
selves be made from imported raw materials. In this case we 
bring in raw materials, work them up into finished products, 
and sell them again to outside people, living ourselves upon 
the profits of the transaction. We virtually sell our labor to 
other nations. 

This method of building up a great population has such vast 
possibilities, provided we are so situated as to be able to do it, 
as to appeal powerfully to the imagination of statesmen and 
nation-builders. If outside markets fail, then we must turn to 

^Cf. Buckle, History of Civilization in England, chap. xi. London, 1 857-1861. 



ECONOMIZING LAND 253 

the development of our own soil, for in that case we must be- 
come physically self-supporting. 

The pent-up versus the expanding type of civilization. Even 
though we aim to become physically self-supporting we have 
two distinct lines of development open to us : one is to develop 
an oriental, or pent-up, type of civilization ; the other is to de- 
velop an occidental, or expanding, type of civilization. By an 
oriental, or pent-up, type of civilization is meant one in which 
we try to live on our existing area of land and to support a 
growing population without adding to our productive area. 
This leads to a gradually increasing intensity of cultivation and 
a gradual lowering of the standard of living of those who work 
on the soil, and eventually of the masses of the people. By 
an occidental, or expanding, type of civiHzation is meant one 
in which the effort is made to maintain the standard of living 
and the product per man in a growing population by widening 
our cultivated area rather than by cultivating the original area 
more intensively. If we had been developing a pent-up civiliza- 
tion we should never have spread, say, outside of the original 
thirteen states, but should have tried to support our increasing 
numbers by cultivating the soil more and more intensively. 
Indeed, we should probably not have left Europe in the first 
place, unless it had been to escape persecution. We have pre- 
ferred to expand over more land rather than to try to live on 
the original area, whatever that original area might have been. 
It is difficult to see where this tendency will lead us, but it is 
a rather striking fact that from the Greeks down to the nations 
of the present every great European nation has been a colonizing 
nation. Thus people have preferred to go where land was abun- 
dant rather than to stay wherf population was dense. Unless we 
change our habit very decidedly we shall try to maintain our 
standard of living. When this cannot be achieved by intensive 
cultivation we shall swarm or send out colonists ; that is, some 
people will emigrate. The only alternative would be the main- 
tenance of a stationary population through birth control. 



254 PRINCIPLES OF NATIONAL ECONOMY 

The table on the following page shows, roughly, the area of 
land which it takes to produce, under fairly good agriculture, 
the food of a soldier for a year. 

This does not take into consideration the land necessary to 
clothe him or to feed the horses which are used to cultivate the 
land. If we assume that an average family of five persons will 
consume as much as do three soldiers, we shall conclude that it 
takes nine acres to produce food for a family. Besides, the land 
must grow feed for the horse that plows and cultivates it. Ac- 
cording to the United States Census, in the great farming area 
of the upper Mississippi Valley there is one farm horse for every 
thirteen acres under cultivation. If, to be fairly liberal, one 
horse is sufficient to cultivate on the average fourteen acres, we 
might conclude that one horse could furnish the power neces- 
sary to cultivate enough land to grow the food for one family 
(nine acres) and for himself besides (five acres), or a total 
of fourteen. 

The yields assumed in the table on page 255 are not unusu- 
ally large, being about the same as those in England and other 
well-cultivated countries ; but they are about twice the average 
yields in this and other new countries. 

One very important part of the problem of economizing land 
is that of preserving and improving its present fertility. This 
is to be done mainly by careful management of the soil. Crop 
rotation, a proper balance between plant-growing and animal 
husbandry in order to supply natural manure, and an increased 
use of chemical fertilizers are the main parts of a policy of soil 
conservation. How important an item natural manure is in 
our national economy may be shown by the following facts: 
It has been conservatively estiriiated^ that the value of the 
animal manure of the country exceeds two billion dollars 
($2,225,700,000). This is greater than the combined value of 
all the mineral output and the entire timber cut of the country 
at the time the estimate was made. If one third of this is 
wasted, it amounts to a sum much greater than the value of the 

^Farmers' Bulletin 192, p. 5, United States Department of Agriculture. 



ECONOMIZING LAND 



255 



STANDARD RATION FOR UNITED STATES ARMY 



Articles Consumed' 



Ounces 

ETC. 

PER Day 



Pounds 
PER Year 



Good Yield 
IN Pounds 
per Acre 



Acres required 

to produce 
Yearly Ration 



Beef, fresh 

Flour 

Baking powder 

Beans 

Potatoes 

Prunes 

Coffee, roasted and ground . . 

Sugar 

Milk, evaporated, unsweetened 

Vinegar 

Salt 

Pepper, black 

Cinnamon 

Lard 

Butter 

Sirup 

Flavoring extract, lemon . . 



20. 
18. 
.08 
2.4 
20. 
1. 28 
1. 12 
3-2 
•5 

.16 gill 
.64 oz. 
.04 
.014 

.64 

•5 

.32 gill 
.014 



456.25 
410.6 

55- 

456-25 

29.2 

-5-55 
73- 
"•5 
14.6 



14.6 
11.5 
29.2 



200 
1,200 

2,400 
12,000 
3,000 
4,800 
2,500 
625 
3,000 



300 

75 
2,500 

Total 



J.28 

•34 

.022 
.038 
.009 
.005 
.029 
.018 
.004 



.048 

•153 
.01 



2.956 

(Roughly, 

3 acres) 



entire timber cut pf the country. Clearly the conservation of 
our animal manure is one of our greatest conservation problems.^ 
The increasing use of chemical fertilizers, however, is necessary 
if we are to make increasing drafts upon the soil in order to feed 
our increasing population. 

iCf. "United States Army Regulations, 1913" (corrected to April 15, 1917). 
paragraph 1205, p. 240. Government Printing Office, Washington, 191 7. 

2 "The Organization of a Rural Community," Yearbook of the United States 
Department of Agriculture, 1914. 



CHAPTER XVn 
THE BALANCING OF THE FACTORS OF PRODUCTION 

Balanced rations, fertilizers, etc. Every farmer nowadays is 
familiar with the idea of a balanced ration for his live stock 
and a balanced fertilizer for his soil. Students of human dietet- 
ics also are familiar with the idea of a balanced ration for man. 
By a balanced ration is meant one which contains the differ- 
ent food elements in the proportion in which the body needs 
them. By a balanced fertilizer is meant either one which con- 
tains the different elements of plant food in the proportion in 
which plants need them, or one which will balance up the 
soil and put into it the elements of plant food which it lacks. 
Thus, a soil that is rich in nitrogen but deficient in potash 
would need a fertilizer that was particularly rich in potash. 
Not long ago the writer was at the home of a professor of 
agriculture in one of our leading agricultural colleges. The 
grass was growing up between the bricks in the sidewalk in 
front of the agriculturist's house. As a demonstration he was 
using fertilizer to kill the grass. It was excellent fertilizer, 
and in the proper relation it would have made the grass grow 
more luxuriantly. He simply put on too much, and the re- 
sult of the bad balance was to kill the grass. In addition to 
those elements of plant food which ordinarily go into the fer- 
tilizer, moisture and other factors are required. If there is 
too much of one and too little of another factor, plants will not 
grow. Everyone is familiar with the fact that on swampy land 
plants will not grow because there is too much water, and that 
on desert land they will not grow because there is too little. 

Balanced ingredients. All these facts are mentioned to make 
it perfectly clear to the student that in almost any line of 

256 



THE BALANCING OF FACTORS 257 

production the question of the balance of factors is a very 
important one. All the factors may be present, but if they 
are not in the right proportions, production will be reduced 
or even destroyed. This is true not only of the elements of 
plant and animal growth, which are agents of production, but 
of tools, implements, raw materials, and other things which 
enter into a mechanical industry. In the manufacture of old- 
fashioned gunpowder, for example, charcoal, saltpeter, and sul- 
phur were required, and they had to be combined in fairly 
definite proportions. If it happened that there was more char- 
coal on the market than would combine with the limited supply 
of one of the other ingredients, say saltpeter, the production of 
gunpowder was limited by the small supply of saltpeter and not 
by the supply of charcoal. Only as much gunpowder could be 
manufactured as the small supply of saltpeter would permit. 
In the making of old-fashioned mortar, lime and sand were re- 
quired. Too much of either one or too little of the other would 
spoil the mortar. If in any given situation there should happen 
to be a scarcity of sand, very little lime could be used, because 
only as much mortar could be made as the limited supply of 
sand would permit. Again, however abundant both lime and 
sand might be for the making of mortar, if brick and stone were 
scarce, very little mortar could be used, and there would, there- 
fore, be very little productive demand for sand and lime. 

Balanced agents of production. This principle applies not 
only to the raw materials which are used in various lines of 
production but to the active agents themselves, such as labor. 
However numerous the hodcarriers might be, if there were a 
scarcity of brick and stone masons not many hodcarriers could 
be used. The farmer who had plenty of land and tools, but no 
horses, oxen, or tractors, would not be able to use either his 
land or his tools effectively. If he could not raise the money 
in any other way, it would pay him to sell some of his tools or 
some of his land and buy horses in order to restore the balance. 
At bottom this is much the same problem as that of balanc- 
ing rations or fertilizers. Again, however much land he might 



258 PRINCIPLES OF NATIONAL ECONOMY 

possess, if he lacked equipment his farm would not be very 
productive. It would pay him, if he could not raise the money 
in any other way, to sell some of his land in order to buy equip- 
ment of various kinds. Some of our frontier farmers found 
themselves in possession of a soil which was very rich in plant 
food. They lacked, however, other forms of capital, or the 
money wherewith to purchase building materials, machinery, 
live stock, etc. Many of them virtually sold their surplus soil ; 
that is, they grew such crops as they could, sold them, and 
took no pains to replace the fertility which was used up in the 
growing of the crops. They are said to have "mined the soil"; 
that is to say, as the miner extracts his mineral and puts noth- 
ing back, so many of these frontier farmers extracted plant 
food and put nothing back. Whatever may be said of this from 
the point of view of national policy, it was, under the circum- 
stances, undoubtedly good business from the point of view of 
the farmer. He was trying to balance up his establishment. 
Having an abundance of plant food in his soil, but very little of 
anything else, he found it to his advantage to sell some of his 
plant food in order to put up houses, barns, and fences and pur- 
chase machinery and live stock. He was doing virtually the 
same thing that another farmer would do who found himself 
in the possession of a large number of horses and no plows or 
harrows to which to hitch his teams. It would pay him to sell 
some of his horses and buy enough equipment to make the 
remaining horses productive. 

A balanced nation. This principle of balancing up the factors 
of production is just as important for the nation as a whole as 
it is for the individual farmer or manufacturer. The country 
which possesses a surplus of land and a scarcity of labor will 
find that its land is very ineffectively used. What it needs is 
more labor. It cannot very well sell its land, but it will in all 
probability pursue a policy which will increase its labor supply. 
Labor under such conditions will be in great demand, and for 
the same reason that, in dietetics, protein will be in great de- 
mand if it is scarce while the other food elements are abundant. 



THE BALANCING OF FACTORS 259 

In such a community land is certain to be cheap and labor dear. 
The high price of labor, the ease with which men can establish 
themselves on the land as independent farmers or get re- 
munerative work, encourages early marriages and large fam- 
ilies. This is especially true on the farms, where labor is scarce 
and land abundant. Every additional child is money in the 
farmer's pocket, because as soon as the child is old enough to 
work he helps to solve the ever-present problem of scarcity of 
labor. Immigration is also likely to be encouraged by such 
a country. And thus from two sources the labor supply is 
increased in response to the effort to balance up the factors 
of production. 

But tools and equipment of all kinds, which are generally 
included under the word ''capital," are almost, though not 
quite, as essential as either labor or land. If capital is scarce 
while one or both of the other factors are abundant, it will be 
in great demand, for the same reason that labor is in great de- 
mand where it is scarce and land is abundant, or that water is 
in great demand where there is an abundance of land with all 
the elements of chemical fertility, but a scarcity of water. An 
overpopulated country, on the other hand, finds itself with a 
badly balanced industrial system, but the balance is in this 
case disturbed in the opposite direction. Land being the scarce 
factor, every acre that can possibly be used is of the utmost im- 
portance. Labor, on the other hand, is cheap. It can easily 
be spared. If it sees fit to migrate to other countries, no great 
effort is made to prevent it, no high price being offered it as 
a reward for staying at home. Under such circumstances, to 
hold an acre of land out of use would seriously reduce the total 
production of the community. 

Balanced capital. As on the farm or in the factory we saw 
that different kinds of tools have to be combined, so we should 
find that different kinds of capital, or tools, have to be combined 
in the nation at large. If, for any reason, the country should 
find an oversupply of one class of tools, say agricultural im- 
plements, and an undersupply of another class of tools, say 



2 6o PRINCIPLES OF NATIONAL ECONOMY 

railroads and rolling stock, the productive power of the whole 
nation would be limited by the deficiency of transportation 
facilities. However much might be produced with the agri- 
cultural implements, if it could not be transported to market, 
it would be of little use. This would be a case of a badly 
balanced national capital. The result would be that the indus- 
trial system, if it were a good system, would find some way to 
restore the balance. It would be poor economy, under such 
circumstances, to increase the production of agricultural ma- 
chinery. That would add very little to the total producing 
power of the nation. If something could be added to the 
transportation facilities, that would add considerably to the pro- 
ductive power of the nation. Under a well-organized industrial 
system the readjustment takes place automatically. Farm im- 
plements become cheap. Farmers do not care to buy any 
more, and the manufacturers are discouraged from production. 
Railroad building, however, is stimulated by the high earn- 
ings of the existing railroads; and the productive energy of 
the community is diverted from the manufacture of agricul- 
tural implements to the building of railroads and the manu- 
facture of railroad equipment. 

If we reverse the supposition of course we get the opposite 
results, but the same principles will be at work. If we should 
find an overabundance of railroad facilities and a scarcity 
of agricultural implements, then it would be to the interest of 
the country to have more agricultural implements. If the 
existing transportation facilities could easily carry all that 
the farms produce and more too, little would be added to the 
national product by building more railroads, and much could 
be added by manufacturing more farm equipment and increas- 
ing the growth of crops. The low earnings of railroads and the 
increased demand for farm machinery would tend to divert 
the productive power of the nation from railroad building to 
the manufacture of farm implements and the use of them 
on the farms. 



THE BALANCING OF FACTORS 261 

This principle is of universal application, and thousands 
of illustrations could be multiplied if it were necessary. If we 
apply it to the railroads themselves, we find it working in the 
utmost detail. When a railway system does not have rolling 
stock enough to utilize its tracks its capital is badly balanced, 
and naturally the thing to do is to get more rolling stock and 
more freight, in order to utilize the trackage advantageously. 
In other cases the road may find itself with more rolling stock 
and more business than can be done effectively on its existing 
trackage. It must then begin adding to its trackage rather 
than to its rolling stock, in order to restore the balance. 

The fundamental problem of scientific management. The 
fundamental problem of all management, whether it be that 
of a diet kitchen, a farmer's feeding lot, a farm as a whole, 
a factory, a railroad, or a nation, is the problem of balanc- 
ing the factors of production. The problem of managing the 
nation is commonly called the problem of statesmanship, and 
the fundamental problem of all statesmanship is that of bal- 
ancing the factors of national life. To have so much produc- 
tive power as to tempt barbarians from the outside to invade 
and rob, and so little mihtary defense as to be unable to 
repel barbaric invasions, is to invite national disaster. On the 
other hand, to maintain so large a fighting-machine as to in- 
terfere seriously with the work of production is also bad states- 
manship, because it preserves a bad balance of the factors of 
national life and prosperity. To encourage immigration and 
the multiplication of numbers beyond the point necessary to 
utilize the land effectively also produces an unbalanced situa- 
tion. To discourage immigration or the multiplication of 
numbers to such an extent as to leave the land inadequately 
utilized is equally bad. 

A balanced population. The greatest danger of all, however, 
and the one which, apparently, is least appreciated by some of 
our statesmen, is that of producing a badly balanced popula- 
tion. At the beginning of this chapter the question of the 



2 62 PRINCIPLES OF NATIONAL ECONOMY 

balancing of the hodcarriers and the brick and stone masons 
was mentioned. This may be taken as typical of the neces- 
sity of balancing skilled labor and unskilled labor. To have 
more miskilled labor than can be used effectively with the 
limited supply of skilled labor is quite as bad as to have more 
people than can be supported on the land or fewer people than 
are necessary to utilize the land. To have more manual labor 
than will combine effectively with mental labor, to have more 
mental laborers who are capable of doing only routine work 
than will combine effectively with those mental laborers who 
possess originality, inventiveness, and the power of leadership, 
is also to produce a bad balance. 

Probably the most important of all problems of statesman- 
ship, and at the same time one of the most difficult, is that of 
balancing the population so that no particular class of labor 
is either oversupplied or undersupplied with respect to any 
other class. One method of preserving the balance is by educa- 
tion and vocational guidance. Training men for the occupa- 
tions where men are needed, as evidenced by the high wages 
and salaries paid, is one of the quickest and most effective ways 
of preserving the balance. Whenever any occupation is so 
undermanned as to make it difficult to find workers, wages or 
salaries will tend to rise. This increase in remuneration is then 
a standing invitation to young men to prepare themselves for 
that work, and a properly conducted educational system is a 
standing opportunity to young people to prepare themselves to 
accept the invitation. 

Differential rates of multiplication. A wholesome moral life 
would also be a powerful agency working in the same direction. 
Those who have demonstrated that they are needed, by the fact 
that they can fill good positions for which there is a demand 
and for which high wages and salaries are offered, are the ones 
who ought to reproduce their kind most abundantly. Unfor- 
tunately, in most modern communities, they are the very peo- 
ple who multiply least rapidly. On the other hand, those who 
have demonstrated that they are more or less superfluous be- 



THE BALANCING OF FACTORS 263 

cause they can do only a kind of work which is oversupplied, 
and who therefore find difficulty in getting work at all and can 
earn only low wages when they do get it, ought, from the stand- 
point of a balanced population, to multiply least rapidly. Un- 
fortunately they are frequently the very people who multiply 
most rapidly. This differential rate of multiplication helps to 
perpetuate a badly balanced population in spite of all the efforts 
of the schools toward an occupational redistribution of popula- 
tion and a restoration of the balance. 

Geographical redistribution of population. That more land is 
better for a growing population than less land is the theory 
according to which a great deal of the history of the world has 
been constructed. The migration of peoples in search of more 
land is one of the large aspects of human history. There could 
be no possible object in seeking more land, instead of remaining 
content with the land already in the possession of the people, 
were it not for the fact of diminishing returns. Therefore a 
very discriminating writer^ has stated the opinion that the law 
of decreasing returns is the fundamental fact of human history. 
The effort of a growing population to acquire more land is, from 
the standpoint of the present chapter, merely an effort to restore 
the balance between factors of production. In any given state 
of civilization too dense a population (that is, too much labor 
and too little land) works to the disadvantage of the f)eople. 
When they begin to perceive that they would be better off if 
they had more land, nothing except a strong military guard or 
a Chinese wall will prevent emigration. 

Migration of capital. But capital follows the same law as 
population. In a community where the land and labor are not 
properly balanced with an adequate supply of capital, the 
perception of a need for more capital (that is, tools and equip- 
ment) is likely to be pretty clear and definite. This leads to 
the offer of high rates of interest as an inducement to capital 
to migrate from other communities where it is abundant in order 

1 Edward Van Dyke Robinson, "War and Economics," Political Science 
Quarterly, Vol. XV, pp. 581-622. 



264 PRINCIPLES OF NATIONAL ECONOMY 

to supply those communities where it is scarce. The possibilit}^ 
of using each and every unit of capital advantageously is what 
enables borrowers to pay the high rate of interest. The scarcity 
of capital relatively to other factors is what creates the oppor- 
tunity for advantageous use of capital. The formula "More 
capital, more product ; less capital, less product" is appreciated 
with peculiar vividness. This appreciation leads to active bid- 
ding for capital, and this to the offer of high rates of interest. 
The fortunate individual who can gain possession of an addi- 
tional fund of capital, being able to increase his product con- 
siderably, finds it economical to pay a high rate of interest for 
it. If he has capital of his own, whereas his competitors in pro- 
duction lack capital, he will have a great advantage over them 
and will, therefore, secure a large income. According to our 
analysis in Chapter XXXVIII, this additional income which 
he gets from the use of his own capital is interest as truly 
as the income which he gets from lending his capital to 
someone else. 

COLLATERAL READING 

Mill, John Stuart. Principles of Political Economy, Book I, chaps, vii, 
viii, and ix. New York, 1893. 

Smith, Adam. The Wealth of Nations, Book I, chaps, i, ii, and iii, and 
Book III. Oxford, 1880. (Valuable not only as a classic but also as showing 
the author's point of approach to the question of national prosperity.) 

Taussig, F. W. Principles of Economics, Book I. New York, 1911, 
(A comprehensive discussion of the organization of productive forces.) 



PART III. THE PRODUCTIVE INDUSTRIES 



CHAPTER XVIII 
THE EXTRACTIVE INDUSTRIES 

Ways of acquiring wealth. In the diagram in the chapter on 
Economic Activities the ways of acquiring wealth are divided 
into two main classes, the uneconomical and the economical. 
It was also pointed out that from the social or national point of 
view it is uneconomical to have men acquiring wealth by 
methods which do not add to the total wealth or well-being 
of the society or the nation. The economical ways of getting 
a living were further subdivided into three classes : the pri- 
mary industries, the secondary industries, and professional and 
personal service. 

The primary industries. The primary industries are them- 
selves subdivided into two classes, the extractive and the genetic. 
Extractive industries are those which merely appropriate nat- 
ural objects without any attempt to replace what is taken or 
to keep up and increase the supply. The genetic industries, 
which might almost be called creative, are those primary indus- 
tries which make a conscious effort to replace that which is 
taken and to increase the supply. Thus, hunting wild animals 
and grazing domesticated animals on free ranges are extractive, 
whereas tillage and stock-breeding are genetic. Lumbering or 
cutting timber in a natural forest is extractive, whereas forestry, 
the scientific growing of timber, is genetic. Mining is extrac- 
tive. There does not seem to be any genetic industry which 
bears the same relation to it as fish culture bears to fishing, or 
forestry to lumbering. 

Hunting. Of all industries hunting is the most primitive. It 
was sometimes combined with fishing as a means of subsistence. 

It usually included the search for edible fruits, nuts, and vege- 

267 



268 PRINCIPLES OF NATIONAL ECONOMY 

tables, as well as the killing of animals, and it sometimes even 
degenerated into a man hunt ; that is, the hunting, killing, and 
robbing of men. Where animals constituted the most abundant 
source of food, primitive men quite naturally hunted animals. 
Where fruits, nuts, and edible roots were abundant it was not 
uncommon for the search for these foods to become the chief 
occupation. The hunting of animals led naturally to domesti- 
cation and herding, and the search for fruits and herbs led 
quite as naturally to horticulture, as the next stage in industrial 
development. Our own primitive ancestors seem to have been 
hunters, and later herdsmen, before they took up agriculture. 
The North American Indians lived mainly by hunting animals, 
though they had taken to the cultivation of crops on a small 
scale. They seem not to have domesticated any animal except 
the dog, before the coming of the white man. This direct pas- 
sage from hunting to tillage, without an intermediate stage of 
herding, is considered somewhat exceptional. The ancient Peru- 
vians had domesticated the llama and the alpaca. The ancient 
Mexicans had become horticulturists apparently without hav- 
ing been herdsmen at all ; their primitive hunting seems to have 
consisted mainly in searching for fruits and herbs rather than 
for animals. 

Hunting, which includes trapping, has played an important 
part and still plays an appreciable part in our national economy. 
The abundance of game on our Western frontiers, when we had 
a frontier, was an important source of food for the advance 
army of settlers. The emigrants who crossed the Great Plains 
in the early settlement of the Pacific coast also benefited to a 
certain extent from the herds of buffalo, deer, elk, and antelope 
which at one time abounded. More important, however, was 
the regular business of trapping fur-bearing animals and of 
trading with the Indians for the skins and furs which they col- 
lected. A great deal of the history of our frontier, beginning 
with the first settlements on the Atlantic coast and continuing 
across the continent, has been a history of the fur trade. Rela- 
tively to her size and her other industries, the fur trade has been 



THE EXTRACTIVE INDUSTRIES 269 

even more important in Canada than in the United States. 
Great companies, such as the Hudson Bay Company and the 
Northwest Company of Merchants of Canada, were organized 
which, especially during the eighteenth and early nineteenth 
centuries, swayed the destinies of that country and parts of our 
own Northwest. They maintained numerous trading-posts and 
employed thousands of men, who explored every nook and 
corner of the territory over which they operated. Similar 
though smaller companies were formed within the United States 
to trade with our own Indians. Many of our Western pioneers, 
guides, and scouts, of whom Kit Carson was the most famous, 
began their careers as hunters and trappers for these various 
companies. The story of their adventures adds a romantic 
element to the early history of our Far West, but they were 
making their living by gathering furs to supply the demands 
of commerce. 

After the building of the transcontinental railroads across 
the great Western plains a rich harvest of buffalo skins was 
reaped for a few brief years. The lamentable result was that 
the buffaloes, or bison (as they are more properly named), 
which had roamed in countless numbers over those plains, were 
almost exterminated in the two decades from 1870 to 1890. 
It is doubtful whether such a slaughter of noble animals had 
ever taken place before in the histoi"y of the world. 

As the country has become settled, fur-bearing animals, as 
well as other wild animals whose skins form articles of com- 
merce, have tended to grow scarcer, though no such wholesale 
destruction has overtaken any of the others (except the beaver) 
as that which overtook the buffalo. Most of them are small 
enough to find cover and sustenance for small numbers in the 
woods and fields of settled communities. Therefore hunting 
and trapping still supply a small fraction of our national in- 
come. The most valuable of all our inland fur-bearing animals, 
the beaver, has almost disappeared, along with the buffalo; 
but minks, muskrats, raccoons, opossums, skunks, foxes, and 
coyotes are still found in small numbers. The subarctic regions 



2 70 PRINCIPLES OF NATIONAL ECONOMY 

of northern Canada and Alaska still yield considerable harvests 
of furs, while the seals which congregate in the Bering Sea, if 
adequately protected, may prove a valuable national asset. 

Fishing. While hunting, as a source of national wealth, tends 
to decline in importance as the country develops, fishing seems 
to increase. One reason for the decline of hunting is the simple 
fact that land becomes too valuable for other purposes to be 
allowed to remain in its wild state as a refuge or feeding-ground 
for wild animals. When it is turned to other purposes most of 
these animals must of necessity disappear. The same is ap- 
parently true of many inland streams which once furnished 
small quantities of fish. But the larger lakes and, especially, 
the oceans furnish an almost inexhaustible quantity of excellent 
food. As population and the demand for food increase, the har- 
vest of the sea assumes a more and more important part in our 
national economy. According to the last estimate of the Fed- 
eral Census there were in the United States, including Alaska, 
7347 vessels engaged in the fishing industry, 166,343 per- 
sons were employed, and the total value of the product was 
$75,029,973. The total value of the fisheries of the world is 
estimated at something over $480,000,000. 

We have as yet scarcely begun to realize the possibilities of 
this harvest of the sea. Practically every fish which lives in 
these northern waters is good for food if properly prepared. 
Every decade we are discovering that some variety which has 
formerly been rejected is quite as good as any that we have 
hitherto prized. Thus far we have chosen only a few of the 
many varieties with which the sea abounds. 

Pasturage. It would be impossible to estimate how much the 
civilized races of the north-temperate zone owe to such domestic 
animals as the horse, the ass, the cow, the sheep, the goat, and 
the pig. All these animals have, at one time or another, fur- 
nished food for man. The horse, the ox, and the ass have 
furnished that which has played almost as important a part as 
food in man's conquest of nature; namely, power. Before 
steam and electricity had been harnessed, or water power devel- 



THE EXTRACTIVE INDUSTRIES 271 

oped, these animals were almost the only source of power be- 
sides human muscles. The skins of all were and are still 
utilized, there being no very good substitute for leather even to 
this day. The cow and the goat have furnished and still furnish 
milk, one of our most important articles of diet. The wool of 
the sheep is even now, next to cotton, the most important 
material for the manufacture of clothing. 

In their native state all these animals except the pig lived 
almost exclusively upon grass, either green or dried in the form 
of hay, and they still depend mainly upon it. Even the pig, 
with his omnivorous appetite and his accommodating stomach, 
will thrive on grass as his chief article of diet, though he needs 
some more concentrated food in addition if he is to make his 
best growth. Grass and grazing have therefore played a very 
important part in the economic life of that branch of the human 
race from which we are derived. Our ancestors were already 
herdsmen before they emerged from prehistoric darkness. All 
the animals now under domestication and all the fowls, except 
the turkey, were domesticated so long ago that we have no 
record as to where or when it occurred. It may give us a new 
respect for those prehistoric ancestors of ours when we reflect 
that we have never succeeded in thoroughly domesticating any 
animal since we have had a history, though we may soon suc- 
ceed with the zebra. There has never been a period of which 
we have any record from the earliest times to the present when 
our branch of the human race did not depend for its subsistence 
largely upon the grazing animals. During the greater part of 
our historic life our domestic animals grazed on wild or native 
grasses. Feeding them upon cultivated grasses and grains will 
be discussed under Agriculture. 

Grazing on our Western frontier. From the earliest settle- 
ments in the territory now occupied by the United States, 
grazing has been an important industry. Following closely in 
the wake of the hunters, trappers, and fur-traders and in ad- 
vance of the farmers have gone the herdsmen. The wild grasses 
furnished a ready source of income to the man who possessed 



2 72 PRINCIPLES OF NATIONAL ECONOMY 

animals capable of turning them into salable products. The 
frontier settlements of colonial New England possessed large 
herds of cattle, and down to 1820 beef was one of the principal 
exports. Hogs ran wild in the woods and, living as they did on 
roots and mast, furnished an abundant supply of meat. Horses 
were exported in considerable numbers. After the danger from 
wolves had been reduced, sheep were grown in large numbers. 
In Virginia and the Carolinas grazing developed even more 
rapidly. The cattlemen had their brands registered, they or- 
ganized round-ups, and they carried on the business very much 
as it was carried on in the Far West in the seventies and eighties 
of the last century. 

The herdsmen continued to move westward in advance of the 
more permanent settlements, but the farmers who plowed the 
land and harvested crops kept many animals to graze upon 
the native grasses which still flourished upon the unbroken 
lands. Before the building of the railroads great herds of cattle, 
sheep, and hogs were driven sometimes hundreds of miles to 
market in the cities of the Atlantic coast. A hog which could 
not transport itself to market was not of much value; conse- 
quently not much attention was given to the breeding of the 
short-legged, barrel-shaped hog of the present day. The cattle, 
likewise, were built more for traveling than for meat. The oxen 
of that period, which were preferred to horses for heavy farm 
work, were well adapted to that purpose. 

When the advance waves of settlement reached the great 
prairies of the West the grazing industry entered a new phase. 
Those natural meadows of vast extent furnished a much more 
abundant pasturage than had the great forest which extended 
almost unbroken from the Atlantic coast to western Ohio in the 
central part of the country and to the Mississippi River and 
beyond on the north and south. Goats and asses had never 
figured largely among the domestic animals of this country, 
but horses, cattle, sheep, and hogs multiplied rapidly. On 
these Western prairies — the former home of countless herds of 
buffalo, deer, elk, and antelope, all of which were grazing ani- 



THE EXTRACTIVE INDUSTRIES 273 

mals — cattle and sheep were very economically produced and 
would have been enormously profitable had not the prices of 
beef, mutton, and wool fallen so low as barely to cover the low 
cost of production. Dwellers in Eastern cities enjoyed abnor- 
mally cheap meat and continued to do so until the very end of 
the nineteenth century ; since that time meat prices have been 
gradually approaching a normal level again. 

The Texas cattle trail. After the close of the Civil War the 
grazing industry entered still another phase. Vast herds of 
cattle, brought by the early Spanish settlers, had long roamed 
the plains of Mexico and Texas. After Texas entered the United 
States the grazing industry developed rapidly under the en- 
ergetic management of American cattlemen. Texas cattle be- 
gan to enter the markets of the North and East. The Civil 
War put a stop to this for a time. At the close of the war the 
Texas ranges were swarming with cattle. They soon began 
to move northward in search of more pasture as well as better 
markets. This drift northward followed, in the main, the 
western edge of the settlements ; and the route came to be 
known as the Texas Cattle Trail. As settlements extended 
westward the trail necessarily moved westward also. 

By this time the northern ranges were all west of the Missis- 
sippi River and were soon confined to the Great Plains. 
Farming on these plains was slow in development because of 
the insufficient rainfall. Therefore the tide of westward set- 
tlement was so retarded as to permit a considerable develop- 
ment of what came to be called cattle-ranching. The grazing 
industry was given more time in which to develop systemati- 
cally. It was less transitory than it had been on the rapidly 
moving frontier of earlier times. It still survives over con- 
siderable areas of the arid West (that is, west of the one 
hundred and second meridian), though it is becoming more 
restricted through the gradual settlement of the better lands 
by farmers. Nearly half the beef cattle and more than half 
the sheep of the United States are grown on these ranges, 
though many of the animals raised there are afterwards fat- 



2 74 PRINCIPLES OF NATIONAL ECONOMY 

tened in what is known as the Corn Belt ; that is, the country 
in which Indian corn is the leading crop. This belt extends 
from Ohio westward beyond the Missouri River, roughly to 
the ninety-eighth meridian. Considerable numbers of horses 
also are grown on these ranges, but most of them are grown on 
the farms farther east. Goats also have increased on some of 
the southwestern ranges, though they have never played a very 
important role in our national economy. 

Lumbering. Next to grass the most valuable natural product 
of the soil is timber. It might occupy first place if the value of 
the native timber standing at a given time were compared with 
the value of the native grass standing at the same time. The 
proper basis of comparison, however, is the annual growth of 
the two products on soil equally good for either. Though this 
is sometimes called the Age of Steel, wood is still an important 
and almost indispensable material. 

The first settlers on our Atlantic seaboard found a dense and 
apparently limitless forest extending from the coast westward. 
It was not until well into the nineteenth .century that the ad- 
vance guard of the army of Western migration began to emerge 
from this forest onto the great prairies of the West. Timber 
was so abundant as scarcely to be considered an economic 
good. Certainly the settlers had little occasion to economize 
it. The best of it they used rather lavishly; the rest they 
destroyed in order that they might use the land for things 
which they needed more than they needed timber. Along 
the northern tier of states the great forest extended as far 
west as Minnesota. In the middle strip the prairies began in 
parts of northern Indiana. Farther south the forest followed 
the Ohio valley to the Mississippi and extended beyond through 
central and southern Missouri, Arkansas, and Louisiana into 
portions of eastern Kansas, Oklahoma, and Texas. Other for- 
ests were found in the high mountains of the West, but the 
finest of all were found in the region of Puget Sound in our 
extreme Northwest. 



THE EXTRACTIVE INDUSTRIES 275 

After the first onslaught of the settlers, who were bent on 
getting rid of the timber in order to clear the land for cultiva- 
tion, lumbering became a regular business in every part of our 
forested area. Its greatest development was in lands which 
were not the most valuable for agricultural purposes. Along 
our northern border, where the climate was somewhat severe 
and where the soil was rather light and sandy, the timber was 
not destroyed in order to clear the land, because better lands 
were available farther south. When the timber of this northern 
strip came to have a commercial value this region became the 
scene of lumbering on a large scale. Large companies were 
formed, thousands of men were employed, and great fortunes 
were made. Lumbering in this region, particularly along the 
Great Lakes and the upper tributaries of the Mississippi River 
(that is, in the states of Michigan, Wisconsin, and Minnesota, ' 
where water transportation was cheap), developed rapidly dur- 
ing the latter half of the nineteenth century and then declined 
rapidly. A similar development took place in the Southern 
states. Here the greatest activity was along the southern coast, 
just outside of the Cotton Belt ; that is, on land which was not 
cleared primarily for the purpose of growing cotton, but where 
the timber was left standing until it had acquired a commercial 
value through the increased demand and the improvement of 
transportation facilities. The most valuable timber tree of this 
belt was the yellow pine, as the white pine had been in the case 
of the northern belt. 

Lumbering, however, has by no means been confined to these 
two belts. Much timber of various kinds and qualities is cut 
every year in every state in the Union, though naturally it is 
less in the prairie states than in those which were originally 
forested. In the older states some of the timberland has been 
cut over several times since the first settlement and will doubt- 
less yield many harvests in the future. But the greater part of 
our original virgin forest has been destroyed. Such cut-over 
lands as are not suitable for other purposes or not needed im- 



2 76 PRINCIPLES OF NATIONAL ECONOMY 

mediately for agriculture will undoubtedly be allowed to refor- 
est themselves or be reforested by scientific methods, but it is 
safe to say that the days of cheap and abundant timber in this 
country are past. From this time forward careful conservation 
will be necessary in order to safeguard an adequate supply. 

Mining. The greatest of all our extractive industries is min- 
ing. Within the boundaries of the United States are found a 
wealth and variety of minerals such as no other country is 
known to possess, though no one knows what new discoveries 
may yet be made in this and other lands. 

Notable among our mineral products are the following. The 
values given are for the year 191 5. 

J Bituminous $502,037,688 

1 Anthracite 184,653,498 

rOre 101,288,084 

iPig ■ . • • • • 40i,409>6o4 

Copper 242,902,000 

Petroleum 179,462,890 

Natural gas 101,312,381 

Gold 101,035,700 

Silver, lead, zinc, aluminum, cement, building-stone, lime, 
and salt are also valuable products, besides many others of less 
value. Our total mineral production for the year 191 5 aggre- 
gated more than two and a third billions of dollars. 

Since minerals are not reproduced or replaced when once 
extracted from the earth, it is only a question of time before all 
of our rich deposits will be exhausted. In some cases the 
deposits are so enormous as to remove the time of their exhaus- 
tion so far into the future that it is difficult for us to realize that 
it is coming. Authorities agree that our coal deposits will last 
for many hundreds of years, some say many thousands of years. 
A thousand years seems a long time to an individual, but it is 
not so very long in the life of a nation. If, however, we have 
enough coal to last, let us say, for only a thousand years, it is 
a difficult question to decide to what extent that should give us 
concern for the future welfare of our country. It is easy to 



THE EXTRACTIVE INDUSTRIES 277 

laugh and to say that it need not concern us, for we shall not be 
here to suffer inconvenience. It is also easy to become too much 
alarmed, for with the progress of invention we may find other 
sources of heat and power before our coal is gone. Probably 
our best policy is merely to avoid unreasonable waste or de- 
struction of mineral resources and then leave future generations 
to work out their own problems. Wisdom will not die with us 
of the present generation. 

Instability of the extractive industries. All our extractive in- 
dustries have not only added greatly to our material wealth ; 
they have likewise given rise to picturesque but somewhat 
unstable phases of our social life. The early hunters and trap- 
pers were a hardy, adventurous race, whose deeds and prowess 
have become a part of our national history. Our herdsmen 
likewise, especially those who developed the cattle business on 
the Great Plains, supplied an element of romance and adven- 
ture which still appeals to the imagination of our people. Our 
hardy fishermen and whalers have given splendid examples of 
the courage and strenuousness which can wrest a living from the 
unconquerable ocean. Our lumber-camps and our mining-camps 
have attracted adventurous and unstable characters from the 
ends of the earth and furnished much excellent material for the 
story-writers. But instability is a characteristic of these indus- 
tries and, consequently, of the life which grew up around them. 
StabiHty can be supplied to our national life only by industries 
which are themselves self-perpetuating. The genetic industries 
must supply that need. 



CHAPTER XIX 
THE GENETIC INDUSTRIES 

What are the genetic industries ? By the genetic industries 
are meant those in which men make conscious and systematic 
efforts to direct the biological processes of reproduction so as to 
increase the supply of desirable plants and animals. The great- 
est of these is agriculture, which includes both the cultivation 
of plants and the breeding of animals. Forestry and fish cul- 
ture are also included under the head of genetic industries. 
Agriculture, however, is sometimes carried on in such a slip- 
shod manner as scarcely to deserve "to be classed as a genetic 
industry. When farmers make no effort to preserve the fertility 
of their soil, but exhaust it by wasteful methods of tillage and 
by reckless overcropping and then move on to new and unex- 
hausted areas, their business is sometimes called mining the soil. 
A genuinely genetic type of agriculture can endure and even 
improve for indefinite periods of time on the same soil; that 
is, it not only preserves but improves the fertility of the soil, 
generation after generation, for hundreds and thousands of 
years. It thus makes possible a stable, an enduring, and an 
expanding civilization such as could not be supported ex- 
clusively by any of the extractive industries. 

Demand of all outdoor industries for space. All those indus- 
tries which appropriate or increase the products of the soil, 
such as hunting, grazing, lumbering, forestry, and farming, 
have one characteristic in common. They all require a great 
deal of space as compared with mining and the secondary indus- 
tries, such as manufacturing and merchandising. So great is 
this demand for space on the part of those industries which 
gather in or develop the products of the soil that those who 
engage in them must of necessity spread themselves over wide 
areas in proportion to their population. They are compelled by 

278 



THE GENETIC INDUSTRIES 279 

the nature of their industries to Hve in scattered homes or 
in small villages located far apart. They are therefore called 
^' rural" (that is, ^' field" or "open-space" industries), and 
those who engage in them are called "rural," "field," and 
"open-space" people. Living so far apart, with plenty of room, 
in close contact with nature but in slight contact with other men 
because of the distances between them, produces a profound 
reaction upon their lives and characters. Perhaps it would be 
more accurate to say that those who engage in the indoor indus- 
tries are so cramped for space and have so few contacts with 
nature and so many contacts with one another that a profound 
and artificial change is produced in their lives. By the indoor 
industries are meant all those which, in contrast to the field in- 
dustries, require so little space that they can be walled in and 
roofed over. It is sometimes difficult for indoor and outdoor 
people to understand one another. 

We have seen in the last chapter that the utilization of the 
soil, not only on our own frontier but also in the development of 
civilized Hfe among our remote ancestors, passed through 
several distinct stages, such as the hunting stage, the grazing 
stage, and the agricultural stage. These are progressive stages 
in the economizing of space. It takes a great deal more terri- 
tory to support a given population by hunting than by grazing, 
and by grazing than by agriculture. When game grew scarce 
or when population increased, those who had the wisdom to 
make the change were forced into grazing, and again into till- 
age, in order to increase their means of subsistence. What an 
uneconomical use of land hunting was may be inferred from the 
fact that, according to the best authorities, there never were 
more than one million Indians within the boundaries of the 
present United States. This territory now supports approxi- 
mately a hundred times that number of people and supports 
them more comfortably than the Indians were supported. Each 
Indian tribe was forced to guard its hunting-grounds lest they 
be invaded by hunters from other tribes and the source of its 
subsistence be cut off. 



2 8o PRINCIPLES OF NATIONAL ECONOMY 

Tillage. Tillage consists essentially of three processes : first, 
preparing a good seed bed, in which plants can grow more 
vigorously than in natural, or unprepared, soil ; second, plant- 
ing in this prepared seed bed the seeds of such plants as are 
deemed most useful or desirable; and, third, destroying all 
other plants, commonly called weeds, which may start to grow 
in competition with the plants whose seeds have been planted. 

Scientific agriculture. While tillage consists essentially of 
these three processes, scientific agriculture includes many 
things besides. We need to be on our guard, however, against 
a pedantic use of the word ''scientific" as applied to agricul- 
ture. Scientific agriculture is nothing more nor less than the 
most economical and effective use of all the factors of agricul- 
tural production. Specifically it consists mainly, though not 
exclusively, in economizing, first, the plant food in the soil; 
second, space; third, labor; and, fourth, capital (or equip- 
ment). Economizing plant food means getting as large a 
product as possible without depleting the supply of plant food. 
Economizing space means getting as large a product as pos- 
sible from a given area ; that is, as large a product per acre as 
possible. Economizing labor means getting as large a product 
per unit of labor, or per man, as possible. Economizing capital 
(or equipment) means getting as large a product per unit of 
capital (or equipment) as possible. 

Excessive economy of any one of these factors always in- 
volves a certain amount of waste with respect to some of the 
others. For example, it is quite possible to economize space to 
such an extent as to exhaust plant food, and vice versa. That 
is to say, a farmer may try for a period of years to get so 
much from each acre as eventually to deplete the fertility of 
his soil. By a judicious rotation of crops and the keeping of 
live stock he may preserve the fertility of his soil for indefinite 
periods, but this may not give him the maximum product per 
acre in the present period. If there is one crop that yields 
better than any other a shortsighted farmer is tempted to grow 
that single crop^ since it would give him a larger product per 



THE GENETIC INDUSTRIES 281 

acre, but such continuous cropping tends to exhaust his soil. 
Rotating tends to preserve the fertility of the soil, but gives 
less per acre in the present; this frequently means growing 
some crops which are not so profitable in the immediate 
present as is the main crop. 

The law of diminishing returns. A similar conflict arises be- 
tween the economy of space and the economy of labor. It is 
possible to try to grow so much per acre as to reduce the prod- 
uct per man, or per unit of labor. It is this phase of the 
question of economy that is commonly known as the law of 
diminishing returns from land. This law is simply that after 
a certain amount of labor with the appropriate tools has been 
applied to the cultivation of a given crop on a given piece of 
land further applications of labor do not yield proportional re- 
turns. They may increase the crop slightly, thus increasing 
the yield per acre, but they will not increase the crop in pro- 
portion as the labor is increased. The result is a decrease in 
proportion to the number of units of labor.^ 

This principle may be illustrated by means of the following 
table, which purports to show how much corn, in a hypothetical 
case, could be produced upon a ten-acre field by using different 
quantities of labor and tools, the quantities being expressed in 
terms of days' labor of a man and team with appropriate tools. 
The ratio between the product and the labor is shown in the 
third column, which states the number of bushels produced per 
day's labor. 

On a field such as we have assumed, it would be possible, by 
using fifty days' labor, to get sixty-five bushels per acre, which 
would be more economical of space than to put twenty-five days 
on it and get only forty-five bushels per acre. It would be less 
economical of labor, however, since by using only twenty-five 
days' labor the farmer gets eighteen bushels for each day, 
whereas he gets only thirteen bushels for each day when he 
applies fifty days' labor to its cultivation. Just how to balance 

iSee the author's chapter on Diminishing Returns, in his volume, "The Dis- 
tribution of Wealth." The Macmillan Company, New York, 1914. 



282 



PRINCIPLES OF NATIONAL ECONOMY 



the two factors, land and labor, so as to get the best results 
from both is a very nice problem in farm management. If labor 
is cheap and land is dear it is more important to economize 
space than labor, but if labor is dear and land is cheap the 
opposite is better. 



Day's Labor of a Man 

AND Team with 

Appropriate Tools 


Total Yield in 
Bushels 


Bushels per Day's 
Labor 


Bushels per 
Acre 


I 





0' 







5 

lO 

IS 


50 

150 
270 


10 

IS 
18 


Increasing 
returns 


5 
IS 

27 


20 


380 


19J 




38 


25 


450 


18 1 




45 


30 


510 


, 17 




SI 


35 


560 


16 


Diminishing 


56 


40 


600 


IS 


returns 


60 


45 


630 


14 




63 


50 


650 


I3J 




65 



The great law of productivity. This law of diminishing re- 
turns has been called the great law of agricultural production. 
It is a part of a wider law, which may be called the law of 
variable proportions, which is the fundamental law of all pro- 
duction. This larger law will be discussed in a later chapter 
devoted to that subject.^ For the present it is sufficient to point 
out that it presents the problem of balancing the different fac- 
tors which have to be combined in production. It is much the 
same problem at bottom, whether it be the balancing of the 
different elements of plant food in fertilizers or of the different 
elements of animal food in the feeding of cattle, the balancing 
of such factors as labor, land, and capital in running a farm or 
a factory or the balancing of the different kinds of people that 
make up a nation. 

The largest industry. Agriculture is not merely one of the 
basic, or primary, industries ; it is the most important of all in- 
dustries if we consider the world at large or any large section of 

iSee Chapter XXXIII. . 



THE GENETIC INDUSTRIES 283 

it which is compelled to live within itself. Considerable sec- 
tions of country and considerable masses of population may live 
primarily by the indoor industries, sending out their surplus 
produce to distant lands and bringing back in exchange the 
products of the soil. Thus a country like England or consider- 
able portions of our own country, such as southern New Eng- 
land, may become largely urbanized ; that is to say, the greater 
portion of the people may engage in indoor rather than in out- 
door industries. But they live by selling the products of their 
indoor industries to people far beyond their own boundaries and 
bringing in from the ends of the earth the products of the soil. 
The United States as a whole is tending to become an urban- 
ized nation ; that is, it is tending toward a condition where more 
than half of its people will work indoors rather than outdoors. 
Again, there is a tendency in the world at large for the indoor 
industries to gain somewhat in importance as compared with 
the outdoor industries, though it is unlikely that the former will 
ever actually overtake the latter. 

Why agriculture is losing ground. As civilization advances, 
people tend to demand finer and finer products for consump- 
tion. Usually, though not in every case, producing a finer prod- 
uct means doing more work in the finer, or finishing, stages. 
It takes no more wool or cotton, and therefore no more agri- 
cultural labor, to make fine than coarse clothing. The differ- 
ence is mainly in the amount of work which is put upon the 
material after it leaves the farm. In other words, of the total 
work put upon material for fine clothes a smaller proportion is 
outdoor labor than for coarse clothes, and a larger proportion 
is indoor labor. The same principle applies to shoes, furniture, 
vehicles, and many articles of food. Throughout the whole 
civilized world this increase in the proportion of labor per- 
formed indoors as compared with that performed outdoors 
tends to increase the city population more rapidly than the 
rural population. 

Another and more important fact is the increased use of 
agricultural machinery. Fewer' men are now needed in the 



284 PRINCIPLES OF NATIONAL ECONOMY 

actual cultivation of the land, as some of the work is done in 
the factories where farm machinery is made. Whereas all the 
men who formerly helped in the harvesting of a wheat crop 
worked in the fields, now some of them work in the shops and 
factories making harvesting machinery, and only a part of the 
total number actually work in the fields. The same change has 
taken place with respect to many other kinds of farm work. 

Influence of occupation on character. Of all the leading oc- 
cupations in civilized countries, there is only one in which suc- 
cess depends primarily upon the ability to deal efficiently with 
nature and natural forces; that is, farming. In most of the 
others success depends quite as much on ability to deal with 
other men as on ability to deal with nature. Those whose 
success depends primarily upon ability to deal with other 
men — whether it be to please, persuade, or amuse them 
or to wheedle the money out of their pocketbooks — must neces- 
sarily become expert in those arts of expression and deportment 
which are pleasing to other men. Those, on the other hand, 
whose success depends primarily upon their ability to deal with 
nature must become equally expert in the art of dealing with 
nature; that is, in handling materials and directing natural 
forces. It is not surprising, therefore, that these two classes of 
experts, having so little in common, should sometimes fail to 
understand and appreciate one another. A farmer, particularly 
the old-fashioned, self-sufficing farmer, who had few points of 
contact with other men but many points of contact with nature, 
would naturally acquire less of what are sometimes called the 
social graces, less adroitness in the amenities of polite society, 
less expertness in indoor etiquette, than one whose business or 
professional success depended upon these forms of skill. They 
who get their living out of the soil must know the soil, the 
weather, the times and seasons, and everything that will affect 
their success, whereas they who get their living by dealing with 
other men must know the ways of men. 

Commercial agriculture. The characteristics which farmers 
of an earlier day developed liaturally and almost of neces- 



THE GENETIC INDUSTRIES 285 

sity are becoming less prominent as the nature of agriculture 
changes. Self-sufficing agriculture has become a thing of the 
past, and we are developing what may be called commercial 
agriculture; that is, a system in which the farmer is a buyer 
and seller, a dealer with other men, to almost the same extent 
as a city business man. He must now understand not only 
markets but political and social conditions, even those deli- 
cate psychological factors upon which successful buying and 
selling depend. This is tending to wipe out whatever dis- 
tinctions formerly existed between the dwellers in the city and 
the dwellers in the country. 

The independence and dependence of the farmer. We are hear- 
ing constantly reiterated, especially by advocates of the back- 
to-the-land movement, that the farmer is the most independent 
person in the world. The farmer himself does not always see 
it that way. Probably no one is so dependent upon outward 
physical conditions as the farmer. He must continually watch 
the weather and guard against pests of all sorts, animal diseases, 
predatory animals, and even town marauders. Every year 
lightning, hail, wind, and floods destroy crops in some part of 
the country. When the farmer thinks of all his troubles he is 
very likely to long for the comparative safety and independence 
of the indoor worker. On the other hand, the indoor worker is 
constantly harassed by troubles of human origin — political 
elections, commercial crises, changes of fashion, the organiza- 
tion of predatory trusts and monopolies, labor troubles, and the 
type of advertiser who levies something akin to blackmail. 
When he thinks of all his troubles he is very likely to long for 
the comparative safety and independence of the farmer. 

One important characteristic of agricultural industry is its 
dependence upon the seasons. The indoor worker is frequently 
able to continue uninterruptedly in one kind of work, week 
after week, month after month, and year after year. From the 
very nature of the case this is impossible in agriculture, for 
every crop has its growing-season and its time of harvest. On 
every farm, almost every hour of the day has its own special 



2 86 PRINCIPLES OF NATIONAL ECONOMY 

work to be done, so that the work is continually changing, not 
simply from season to season, from month to month, and from 
week to week but even from hour to hour. This makes agricul- 
ture almost of necessity an industry of small units. In an 
indoor industry, where a man can be kept at the same job 
continuously, mechanical or automatic administrative methods 
and devices may be installed so as to simplify the work of 
superintendence. It is possible, therefore, for a man of very 
moderate intellect and power to run an establishment employ- 
ing thousands of men. To run ten men efficiently on a farm, 
where each man must be assigned a new job frequently on a 
moment's notice, where the whole work of the farm must be 
reorganized to meet a situation brought about by the change in 
the weather or in the conditions of some growing crop, requires 
as great mental ability as to run an indoor establishment em- 
ploying hundreds of men. To run a farm employing one hun- 
dred men and run it efficiently would require the ability of a 
great military commander, a merchant prince, a captain of in- 
dustry, or a university president. Very few farming establish- 
ments which employ as many as one hundred men have ever 
succeeded or can succeed. 

Country people generally self-employed. Perhaps the most 
important fact concerning agriculture is that a very large pro- 
portion of those engaged in it are self-employed, whereas the 
vast majority of those who live in cities are employed by other 
people. The fact that farming is an industry of small units, 
while indoor industries are generally industries of large units, 
produces this difference. 

Some of the deepest students of political and social tend- 
encies have come to doubt whether democracy can ever develop 
to a high stage of efficiency except among people who are in the 
main self-employed. It is true that modern democracy arose 
first in the cities and towns, but it is likewise true that at that 
time the cities and towns were the homes of self-employed men. 
Before the rise of the factory system such manufacturing as 
was done was carried on in small shops by craftsmen who were 



THE GENETIC INDUSTRIES 287 

in the majority of cases self-employed. The rural districts, 
however, were under the feudal system. Conditions are ex- 
actly reversed at the present time. Under the factory system 
the great majority of people in the indoor industries work under 
bosses. Since the break-up of the feudal system and the rise of 
the one-family farm, which is the characteristic farm in the 
United States, the average dweller in the country is his own 
boss. This may have something to do with the fact that city 
politics are run by bosses and country politics are not. 

According to the census of 1850 there was one farm in this 
country for every fourteen persons living under rural condi- 
tions; that is, outside of cities of eight thousand inhabitants 
or more. According to the census of 1900 there was one farm 
for every nine persons in rural residence. This shows that up 
to 1900, at any rate, the tendency was toward a larger number 
of independently operated farms in proportion to the rural 
population. Again, in 1900 there was one farm of fifty acres or 
more for every 13.4 rural dwellers. When we consider that 
towns and villages of eight thousand or less contain a fair pro- 
portion of those 13.4 people, we shall see that in the open coun- 
try itself there are very few people engaged in work on each 
farm. They are nearly all what are called one-family farms ; 
that is, farms operated mainly by the labor power of one family. 

Interdependence of the sexes. The division of labor between 
the sexes is much more marked, of course, in agriculture than 
in indoor industries. There are so many operations on every 
farm which require the superior muscularity of the male as 
practically to shut women out. At the same time, the fact that 
the farms are so far apart makes it impossible for these mus- 
cular males to get along without women to run their houses. The 
men cannot live in boarding houses, because that would make it 
necessary to live too far from their work. Practically every 
farmer has to have a wife to do the indoor work. This may not 
be the highest motive for marrying, but still it does encourage 
the marriage habit. Consequently one finds in our rural dis- 
tricts fewer old, unmarried males than one finds infesting our 



288 PRINCIPLES OF NATIONAL ECONOMY 

cities and towns. Moreover, there are comparatively few oppor- 
tunities for a woman to make an independent living in the coun- 
try, so that she is almost under compulsion to marry or else to 
move to town, where she can get remunerative employment. 

Forestry. Forestry as- distinct from lumbering has only re- 
cently received attention in this country. The United States 
Timber-Culture Act of 1873 was designed to encourage tree- 
planting by granting not more than one hundred and sixty 
acres of the public land free of cost to anyone who would plant 
a part of it to timber trees. At first it was required that one 
fourth of the land be so planted, but the requirement was soon 
changed to one sixteenth. The purpose was obviously to en- 
courage the partial forestation of the Western prairies, but what 
nature herself had never been able to accomplish was not ac- 
complished by act of Congress. As one rides over the Western 
plains one occasionally sees small tracts of straggling trees 
fighting for an existence on land which is too dry for them. 
These are the results of that act of Congress. Possibly if the 
act had been passed earlier — while there was public land left 
in the humid belt — something might have been accomplished, 
but even this is doubtful. Prairie land which will grow trees is 
generally more valuable for other purposes. Even if a settler 
had, on such land, made trees grow successfully he would prob- 
ably have found it advantageous to cut them down in order to 
devote the land to some more valuable purpose. 

Forestry economical on waste land. Forestry, in order to be 
an economic success, must obviously be practiced on land which 
would produce a greater value at lower cost when planted to 
trees than when planted to anything else. Mountainous and 
semimountainous lands, stony or swampy lands, and those 
which for other reasons are unsuited to tillage or pasturage 
furnish the natural opportunity for the practice of forestry on 
a large scale. While the annual product in the form of the 
annual timber growth is small, the cost is likewise small. Since 
the land would otherwise go to waste altogether, it is better 
to get even a small product than none at all. 



THE GENETIC INDUSTRIES 289 

Scientific forestry. In recent years the Federal government 
and several of the states have created forest reserves. Scien- 
tific forestry is being practiced, but it must be remembered 
that scientific forestry in this country is necessarily different 
from what it is in old countries. In a country where lumber 
is still cheap as compared with other lands, though dear as com- 
pared with what it once was, and where labor is dear, as it is in 
the United States, one cannot do in the name of science what 
one can do in an old country, where lumber is dear and labor 
cheap. A serious problem for the American forester is to keep 
costs down ; unless he does this he may find that the timber is 
not worth what it costs to grow it. For this reason it is not 
the custom in this country to do much planting of trees or 
preparation of the ground. The work is mainly confined, first, 
to cutting out undesirable growths in order to give the more 
durable growths, which are in the main self-seeded, a chance to 
grow ; and, second, and more important still, to guard against 
forest fires. Our summers, which are dry compared with those 
of Europe, make the forest fire the great enemy of the American 
forester. The fight against diseases and pests is a third task. 

Fish culture. Fish culture has been fostered by the Federal 
and state governments of the United States and by various 
private agencies. Spawn is collected and hatched, and millions 
of young fish are distributed in our streams and along our 
seacoasts. A great deal of study is being given to the habits of 
various edible fishes and to the sources of their food. Private 
enterprise also is active in stocking streams and small bodies of 
water and in growing fish of various kinds for the market. 

With our Great Lakes on the north, the ocean on the east and 
the west, and the Gulf of Mexico on the south, and with all our 
noble rivers, we have access to such vast and seemingly inexhaust- 
ible supplies of fish that fish culture in a strict sense has not 
developed very far among us. Hatching and distributing spawn 
and leaving the spawn to shift for itself and take its chances 
along with other wild fish is a step in the right direction, but it 
stops far short of the work of the animal-breeders on our farms. 



CHAPTER XX 
THE MANUFACTURING INDUSTRIES 

Various types of manufacturing establishments. When we 
think of a manufacturing industry nowadays, we are very likely 
to form a mental picture of a huge building or group of build- 
ings dominated by a tall chimney and filled with roaring ma- 
chinery and busy men and women. Such is, indeed, the typical 
factory, though much manufacturing is still done in small shops 
where a few men work with small and comparatively simple 
tools. In the large factory the tools and the raw material, as 
well as the buildings, engines, etc., are usually owned by one 
man or group of men, while the work is done by another group. 
In smaller establishments various combinations are found. One 
kind of manufacturing establishment which is still numerous 
and widely distributed is the small shop where the worker owns 
his own tools and equipment, buys his own raw materials, and 
sells the finished product. It does not constitute much of a 
change, certainly not a revolution, when he hires a few helpers 
or apprentices to assist him. They work with his tools upon his 
raw materials, and they receive their compensation in the form 
of wages instead of in the form of a share of the profits of the 
business. Even where the owner ceases to do any of the work 
except to keep the accounts, buy the raw materials and sell the 
products, and exercise general supervision and management, 
the transition may have been so gradual as to attract no one's 
attention. By this gradual change, however, a type of manu- 
factory may be developed which is very different from that with 
which it started. 

But the transition is not always made in this way. Other 
methods of organization have existed at various times and still 
exist. In one class of shops the worker owns his own tools and 

290 



THE MANUFACTURING INDUSTRIES 291 

runs his own shop, but does not own the raw materials upon 
which he works. These are furnished by an outside person who 
suppHes them and owns the finished product, paying the worker 
a price agreed upon for the work which he does. In this case 
also the worker may hire a few helpers or apprentices. 

Still another method is found where the worker owns neither 
the materials upon which, nor the tools with which, he works. A 
third person supplies both materials and tools, — everything, in 
fact, except the place in which the work is done, which place 
the laborer himself supplies. 

In the modern factory, however, everything is assembled in 
one building or group of buildings, around one power plant ; 
everything is owned by one group of individuals, and the laborer 
furnishes nothing except his own skill and strength. The great 
advantage of this system is its economical use of power. Wher- 
ever a large use of power is necessary it is important that it be 
effectively and economically utilized. In all such cases the 
modern factory tends to displace all other methods of manufac- 
turing. Where comparatively little power is required, and 
where, therefore, it is not of such great importance that it be 
economized, other methods still survive. In some cases, how- 
ever, the competition of the factory is so severe as to force the 
workers in the small shops to work for very low wages. Where 
the main factor in success is the skill of the worker rather than 
cheap power, the small shop will probably continue to compete 
successfully with the factory. There has been a general tend- 
ency, however, for the large factory to grow, and the small shop 
to decline, in importance. 

Progress toward large-scale production. The stages of this 
development from the small shop to the factory are by no 
means clear. Almost every form of manufacturing will be found 
in every stage of economic development. The large factory has 
come to be the dominant form only since the invention of power- 
driven machinery. The Industrial Revolution, as it is called, 
was the rather sudden growth of the factory to this dominant 
position during the latter half of the eighteenth century. 



292 PRINCIPLES OF NATIONAL ECONOMY 

Power-driven machinery and large-scale production. A re- 
markable series of inventions followed one another in rapid 
succession and transformed several of the large industries of 
England into factory industries. These changes put England 
definitely in the lead as a manufacturing nation. The same 
revolution came in other countries a little later. Says Marshall ^ : 

The quarter of a century beginning with 1760 saw improvements 
follow one another in manufacture even more rapidly than in agricul- 
ture. During that period the transport of heavy goods was cheapened 
by Brindley's canals, the production of power by Watt's steam 
engine, and that of iron by Cort's processes of puddling and rolling 
and by Roebuck's method of smelting it by coal in lieu of the char- 
coal that had become scarce; Hargreaves, Crompton, Arkwright, 
Cartwright, and others invented, or at least made economically 
serviceable, the spinning jenny, the mule, the carding machine, and 
the power loom ; Wedgwood gave a great impetus to the pottery 
trade, that was already growing rapidly; and there were important 
inventions in printing from cylinders, in bleaching by chemical 
agents, and in other processes. A cotton factory was for the first 
time driven directly by steam power in 1785, the last year of the 
period. The beginning of the nineteenth century saw steamships and 
steam printing presses, and the use of gas for lighting towns. Rail- 
way locomotives, telegraphy, and photography came a little later. 
Our own age has seen numberless improvements and new economies 
in production, prominent among which are those relating to the 
production of steel, the telephone, the electric light, and the gas 
engine ; and the social changes arising from material progress are 
in some respects more rapid than ever. But the groundwork of the 
changes was chiefly laid in the inventions of the years 1760 to 1785. 

The inventions which preceded the cotton factory. A more 
detailed account of a most remarkable series of inventions 
which revolutionized the cotton industry is given in Walpole's 
*^ History of England from 1815."^ This vivid description may 
be taken as typical of what took place in other industries. 

1 Alfred Marshall, Principles of Economics (fourth edition) , p. 42. London, 1898. 
2 Quoted from Bullock, Selected Readings in Economics, pp. 128-143. Ginn 
and Company, Boston, 1907. 



THE MANUFACTURING INDUSTRIES 293 

In the middle of the eighteenth century, then, a piece of cotton 
cloth, in the true sense of the term, had never been in England. 
The so-called cotton goods were all made in the cottages of the weav- 
ers. The yarn was carded by hand ; it was spun by hand ; it was 
worked into cloth by a hand loom. The weaver was usually the head 
of the family ; his wife and unmarried daughters spun the yarn for 
him. Spinning was the ordinary occupation of every girl, and the 
distaff was, for countless centuries, the ordinary occupation of every 
woman. The occupation was so universal that the distaff was oc- 
casionally used as a synonym for "woman." "Le royaume de France 
ne tombe point en quenouille." . . . To this day every unmarried girl 
is commonly described as a spinster. 

The operation of weaving was, however, much more rapid than 
that of spinning. The weaver consumed more weft than his own 
family could supply him with ; and the weavers generally experi- 
enced the greatest difficulty in obtaining sufficient yarn. 

THE FLY SHUTTLE 

About the middle of the eighteenth century the ingenuity of two 
persons, a father and a son, made this difference more apparent. The 
shuttle had originally been thrown by the hand from one end of the 
loom to the other. John Kay, a native of Bury, by his invention of 
the fly shuttle, saved the weaver from this labor. ... By means of 
these inventions the productive power of each weaver was doubled. 
Each weaver was easily able to perform the amount of work which 
had previously required two men to do, and the spinsters found 
themselves more hopelessly distanced than ever in their efforts to 
supply the weavers with weft. . . . 

HARGREAVES'S SPINNING JENNY 

The trade was in this humble and primitive state when a series 
of extraordinary and unparalleled inventions revolutionized the con- 
ditions under which cotton had been hitherto prepared. A little more 
than a century ago (i 764-1 767) James Hargreaves, a poor weaver in 
the neighborhood of Blackburn, was returning home from a long 
walk, in which he had been purchasing a further supply of yarn for 
his loom. As he entered his cottage his wife, Jenny, accidentally 



294 PRINCIPLES OF NATIONAL ECONOMY 

upset the spindle which she was using. Hargreaves noticed that the 
spindles, which were now thrown into an upright position, continued 
to revolve, and that the thread was still spinning in his wife's hand. 
The idea immediately occurred to him that it would be possible to 
connect a considerable number of upright spindles with one wheel, 
and thus multiply the productive power of each spinster. He con- 
trived a frame in one part of which he placed eight rovings in a row 
and in another part a row of eight spindles. . . . His ignorant 
neighbors hastily concluded that a machine which enabled one spin- 
ster to do the work of eight would throw multitudes of persons out 
of employment. A mob broke into his house and destroyed his 
machine. Hargreaves himself had to retire to Nottingham, where, 
with the friendly assistance of another person, he was able to take 
out a patent for the spinning jenny, as the machine, in compliment 
to his industrious wife, was called. 



ARKWRIGHT'S WATER FRAME 

The invention of the spinning jenny gave a new impulse to the 
cotton manufacture. But the invention of the spinning jenny, if 
it had been accompanied by no other improvements, would not have 
allowed any purely cotton goods to be manufactured in England. 
The yarn spun by the jenny, like that which had previously been 
spun by hand, was neither fine enough nor hard enough to be em- 
ployed as warp, and linen or woolen threads had consequently to be 
used for this purpose. In the very year, however (1769), in which 
Hargreaves moved from Blackburn to Nottingham, Richard Ark- 
wright took out a patent for his still more celebrated machine. . . . 
The principle of Arkwright's great invention is very simple. He 
passed the thread over two pairs of rollers, one of which was made to 
revolve much more rapidly than the other. The thread, after pass- 
ing over the pair revolving slowly, was drawn into the requisite 
tenuity by the rollers revolving at a higher rapidity. By this simple 
but memorable invention Arkwright succeeded in producing thread 
capable of employment as warp. From the circumstance that the 
mill at which his machinery was first erected was driven by water 
power, the machine received the somewhat inappropriate name 
of the water frame; the thread spun by it was usually called the 
water twist. 



THE MANUFACTURING INDUSTRIES 295 



PAUL'S CARDING MACHINE 

The invention of the fly shuttle by John Kay had enabled the 
weavers to consume more cotton than the spinsters had been able to 
provide ; the invention of the spinning jenny and the water frame 
would have been useless if the old system of hand carding had not 
been superseded by a more efficient and more rapid process. Just 
as Arkwright applied rotatory motion to spinning, so Lewis Paul 
introduced revolving cylinders for carding cotton. Paul's machine 
consisted of "a horizontal cylinder, covered in its whole circum- 
ference with parallel rows of cards with intervening spaces, and 
turned by a handle. Under the cylinder was a concave frame lined 
internally with cards exactly fitting the lower half of the cylinder, 
so that when the handle was turned the cards of the cylinder and of 
the concave frame worked against each other and carded the wool." 
" The cardings were of course only of the length of the cylinder, but 
an ingenious apparatus was attached for making them into a per- 
petual carding. Each length was placed on a flat, broad riband, 
which was extended between two short cylinders, and which wound 
upon one cylinder as it unwound from the other." 

CROMPTON'S MULE 

This extraordinary series of inventions placed an almost unlimited 
supply of yarn at the disposal of the weaver. But the machinery, 
which had been thus introduced, was still incapable of providing 
yarn fit for the finer qualities of cotton cloth. "The water frame 
spun twist for warps, but it could not be advantageously used for the 
finer qualities, as thread of great tenuity has not strength to bear the 
pull of the rollers when winding itself on the bobbin." This defect, 
however, was removed by the ingenuity of Samuel Crompton, a 
young weaver residing near Bolton. Crompton succeeded (1774- 
1779) in combining in one machine the various excellences of 
'*Arkwright's water frame and Hargreaves's jenny." Like the former, 
his machine, which from its nature is happily called the mule, ''has 
a system of rollers to reduce the roving ; and, like the latter, it has 
spindles without bobbins to give the twist, and the thread is 
stretched and spun at the same time by the spindles after the rollers 
have ceased to give out the rove." 



296 PRINCIPLES OF NATIONAL ECONOMY 

Before Crompton's time it was thought impossible to spin 
eighty hanks to the pound ; the mule has spun three hundred 
and fifty hanks to the pound ! The natives of India could spin 
a pound of cotton into a thread one hundred and nineteen miles 
long; the English succeeded in spinning the same thread to 
a length of one hundred and sixty miles. Yarn of the finest 
quality was at once at the disposal of the weaver, and an oppor- 
tunity was afforded for the production of an indefinite quantity 
of cotton yarn. But the great inventions which have thus been 
enumerated would not of themselves have been sufficient to 
establish the cotton manufacture on its present basis. The 
ingenuity of Hargreaves, Arkwright, and Crompton had been 
exercised to provide the weaver with yarn. Their inventions 
had provided him with more yarn than he could by any possi- 
bility use. The spinster had beaten the weaver just as the 
weaver had previously beaten the spinster, and the manufacture 
of cotton seemed likely to stand still because yarn could not 
be woven more rapidly than an expert workman with Kay's 
improved fly shuttle could weave it. 

CARTWRIGHT'S POWER LOOM 

Such a result was actually contemplated by some of the leading 
manufacturers, and such a result might possibly have temporarily 
occurred if it had not been averted by the ingenuity of a Kentish 
clergyman. Edmund Cartwright, a clergyman residing in Kent, 
happened to be staying at Matlock in the summer of 1784, and to 
be thrown into the company of some Manchester gentlemen. The 
conversation turned on Arkwright's machinery, and "one of the 
company observed that as soon as Arkwright's patent expired so 
many mills would be erected and so much cotton spun that hands 
would never be found to weave it." Cartwright replied "that Ark- 
wright must then set his wits to work to invent a weaving mill." The 
Manchester gentlemen, however, unanimously agreed that the thing 
was impracticable. Cartwright "controverted the impracticability 
by remarking that there had been exhibited an automaton figure 
which played at chess." It could not be "more difficult to construct 
a machine that shall weave than one which shall make all the variety 



THE MANUFACTURING INDUSTRIES 297 

of moves which are required in that complicated game. Within three 
years he had himself proved that the invention was practicable by 
producing the power loom. Subsequent inventors improved the idea 
which Cartwright had originated, and within fifty years from the 
date of his memorable visit to Matlock there were not less than one 
hundred thousand power looms at work in Great Britain alone. . . . 
Such are the leading inventions which made Great Britain in less 
than a century the wealthiest country in the world. . . , 

THE STEAM ENGINE OF NEWCOMEN AND WATT 

Steam was actually used early in the eighteenth century as a 
motive power for pumping water from mines ; and Newcomen, a 
blacksmith in Dartmouth, invented a tolerably efficient steam engine. 
It was not, however, till 1769, that James Watt, a native of Greenock 
and a mathematical-instrument maker in Glasgow, obtained his first 
patent for "methods of lessening the consumption of steam, and 
consequently of fuel, in fire engines." James Watt was born in 1736. 
His father was a magistrate, and had the good sense to encourage 
the good turn for mechanics which his son displayed at a very early 
age. At the age of nineteen Watt was placed with a mathematical- 
instrument maker in London, but feeble health, which had interfered 
with his studies as a boy, prevented him from pursuing his avocations 
in England. Watt returned to his native country. The Glasgow 
body of Arts and Trades, however, refused to allow him to exercise 
his calling within the limits of their jurisdiction ; and had it not 
been for the University of Glasgow, which befriended him in his 
difficulty and appointed him their mathematical-instrument maker, 
the career of one of the greatest geniuses whom Great Britain has 
produced would have been stunted at its outset. 

There happened to be in the university a model of Newcomen's 
engine. It happened, too, that the model was defectively constructed. 
Watt, in the ordinary course of his business, was asked to remedy 
its defects, and he soon succeeded in doing so. But his examination 
of the model convinced him of serious faults in the original. New- 
comen had injected cold water into the cylinder in order to condense 
the steam and thus obtain a necessary vacuum for the piston to 
work in. Watt discovered that three fourths of the fuel which the 
engine consumed was required to reheat the cylinder. "It occurred 



298 PRINCIPLES OF NATIONAL ECONOMY 

to him that, if the condensation could be performed in a separate 
vessel, communicating with the cylinder, the latter could be kept hot, 
while the former was cooled, and the vapor arising from the injected 
water could also be prevented from impairing the vacuum. The 
communication could easily be effected by a tube, and the water 
could be pumped out. This is the first and the grand invention by 
which he at once saved three fourths of the fuel and increased 
the power one fourth, thus making every pound of coal produce 
five times the force formerly obtained from it." But Watt was not 
satisfied with this single improvement. He introduced steam above 
as well as below the piston, and thus again increased the power of 
the machine. He discovered the principle of parallel motion, and 
thus made the piston move in a straight line. He regulated the 
supply of water to the boiler by means of "floats," the supply of 
steam to the cylinder by the application of "the governor," and, by 
the addition of all these discoveries, " satisfied himself that he had al- 
most created a new engine of incalculable power, universal application, 
and inestimable value." . . . 

The steam engine, indeed, would not have been invented in the 
eighteenth century, or would not at any rate have been discovered 
in this country, if it had not been for the vast mineral wealth with 
which Great Britain has fortunately been provided. ... 

DUDLEY'S METHOD OF SMELTING IRON WITH COAL 

At the commencement of the seventeenth century Dud Dudley . . . 
had proved the feasibility of smelting iron with coal ; but the prej- 
udice and ignorance of the work people had prevented the adoption 
of his invention. In the middle of the eighteenth century, attention 
was again drawn to his process, and the possibility of substituting 
coal for wood was conclusively established at the Darby's works at 
Coalbrook Dale. The impetus which was thus given to the iron 
trade was extraordinary. The total produce of the country amounted 
at the time to only 18,000 tons of iron a year, four fifths of the iron 
used being imported from Sweden. In 1802 Great Britain possessed 
168 blast furnaces, and produced 170,000 tons of iron annually. In 
1806 the produce had risen to 250,000 tons ; it had increased in 1820 
to 400,000 tons. Fifty years afterwards, or in 1870, 6,000,000 tons 
of iron were produced from British ores. 



THE MANUFACTURING INDUSTRIES 299 

The progress of the iron trade indicated, of course, a correspond- 
ing development of the supply of coal. Coal had been used in Eng- 
land for domestic purposes from very early periods. Sea coal had 
been brought to London ; but the citizens had complained that the 
smoke was injurious to their health, and had persuaded the legislature 
to forbid the use of coal on sanitary grounds. The convenience of 
the new fuel triumphed, however, over the arguments of the sani- 
tarians and the prohibitions of the legislature, and coal continued to 
be brought in constantly though slowly increasing quantities to 
London. Its use for smelting iron led to new contrivances for insur- 
ing its economical production. 

Decay of small industries. Scarcely less striking would be 
an account of the rise of machine production in other industries, 
following the use of steam power and cheap iron and steel. 
Shoe manufacturing, the grinding of flour, the slaughtering of 
meat-animals and the curing and packing of meat, the manu- 
facture of watches, automobiles, etc., and various other indus- 
tries have shown the same tendency toward the factory sys- 
tem of production. Regarding changes in our own country, 
Professor Ely writes^: 

Let the reader call to mind the many things in our economic life 
which the world never saw before. He will, of course, think at once 
of the railway and of steam navigation, and of other applications of 
steam to industry. But these have brought other important new 
phenomena. The concentration of large masses of working-people 
in great factories of which they own no part, and under a single 
employer, such as we see daily, is something new for skilled me- 
chanics ; not that nothing of the kind ever existed before, but its 
existence is so much more common and affects so many more people 
that in its social aspects it is new. In the last century, and in pre- 
vious centuries of the Middle Ages, artisans owned the tools which 
they used, and after they had fully mastered their trades, usually 
called no man master, but worked in their own little shops. Even 
within the memory of the author, still comparatively a young man, 
this condition of things has become less common. The smith, under 

1 Richard T. Ely, An Introduction to Political Economy, pp. 55-57- New 
York Chautauqua Press, 1889. 



300 PRINCIPLES OF NATIONAL ECONOMY 

the spreading tree, of whom Longfellow sang, is disappearing. He 
has left the cross-roads in the little village and now works in a 
machine shop. His friends, the carpenter and the shoemaker, have 
accompanied him. A few artisans may stay to do repairing and 
other small work, but the cheaper processes of vast establishments 
have rendered this migration inevitable for the many. Only the few 
among artisans can live in the old style. 



CONCENTRATION IN LARGE CITIES 

Houses are constructed in large establishments and they are sent 
to small places where it is only necessary to put them together. 
Merchants have also been obliged to leave the villages where they 
were owners of independent establishments, to seek employment in 
immense city retail and wholesale shops, because the railroad has 
carried their customers away from them. 

The amount of production increases continually, but the number 
of separate establishments where production is carried on decreases 
uninterruptedly. Milling serves as a good illustration. "The com- 
pletion of the great mills has caused the abandonment and decay 
of hundreds of the picturesque, old-fashioned neighborhood mills. 
In 1870, according to the census of that year, there were in the 
entire country 22,573 grist mills, 58,448 hands, representing $151,- 
500,000 of capital, and making a product worth $444,900,000. In 
1880 the number of establishments was 24,338, the number of hands 
58,407, the capital invested $177,300,000, and the value of the prod- 
uct was $505,100,000 (the price of flour had declined ten per cent 
in this decade). The increase shown in the number of establish- 
ments ... is more apparent than real, the great bulk of flour having 
been made in a decidedly smaller number of mills in 1880 than in 
1870. Since 1880 the blighting effect of the great merchant mills 
upon the small establishments has become visible to every one. Ac- 
cording to the Miller's Directory for 1884, . . . there were at that 
time some 22,940 mills in the country, a decline of -1398 from the 
census figures of 1880. . . . From 1884 to 1886 ... the number 
of milling establishments has declined to 16,856 . . . a loss in two 
years of more than twenty-six per cent." The number of mills in 
the South has dechned more rapidly than elsewhere. In 1880, in 
North Carolina 13 13 mills employed only 1844 men, but in the same 



THE MANUFACTURING INDUSTRIES 301 

state there were only 632 mills in 1886. It is said that the number 
of mills in the country is destined to become very much smaller still. 
Readers can readily gather from census and trade reports many 
similar illustrations of this concentration of business, which is one 
of the main causes of the existence of present problems. 



Tendency of mechanically expert nations toward indoor indus- 
tries. Large portions of the world's population still remain in a 
condition of mechanical inexpertness. They find it more ad- 
vantageous to live from the products of the soil, exchanging 
these for the manufactured products of the mechanically ex- 
pert. Other populations, like those of our own West, while 
mechanically expert, occupy land of such abundance and fer- 
tility that they find it more profitable to cultivate land than 
to turn to the indoor industries. They use their mechanical 
expertness in contriving and operating farm machinery. They 
exchange their large surplus of farm products for the manu- 
factured products of other people who are mechanically expert 
and who occupy lands of less extent and lower fertility. The 
latter, not having vast areas to cultivate, find less profitable 
opportunities for their mechanical expertness out of doors than 
indoors. Therefore they develop the indoor industries. Eng- 
land, which got a good start ahead of the rest of the world in 
this line of development, prospered amazingly. The eastern 
part of the United States, together with France, Belgium, Hol- 
land, and (lately) Germany, has been following in the same 
direction. As this tendency increases, the competition among 
the indoor industries is likely to become so intense as to reduce 
the profits and drive a certain percentage of the people back 
to the farms. 

Taking the United States as a whole, it is rapidly ceasing 
to be primarily an agricultural country and is becoming a manu- 
facturing country, following a similar development in England 
and northwestern Europe. Already more than half of our 
people live in towns of twenty-five hundred or more. Canada, 
South America, Australia, South Africa, and all countries colo- 



302 PRINCIPLES OF NATIONAL ECONOMY 

nized by white men will doubtless follow in the same direction. 
There will then be left only the tropics in which to sell the 
surplus products of manufacture and from which to draw the 
surplus products of the soil. It is probable that the devel- 
opment of the indoor industries will be checked before that 
state is reached. In that case each country will have to pre- 
serve a balance, or equilibrium, between the indoor and the 
outdoor industries. 

As pointed out in the chapter on The Genetic Industries, the 
advance in civilization and the general improvement of living 
conditions tend to add to the relative importance of the indoor 
as compared with the outdoor industries. The finer the goods 
we demand, the more work we make, generally speaking, for 
the indoor workers. Even farm work itself comes, in a sense, 
to be done indoors rather than outdoors. The substitution of 
the tractor for the horse may serve to illustrate this statement. 
The raising of horses is outdoor work ; the manufacturing of 
tractors is indoor work. If we use more tractors and fewer 
horses a larger proportion of our workers will work indoors and 
a smaller proportion outdoors. 

This is a process which must be expected to continue even 
though we remain a self-sufficing nation. If, ceasing to be a 
self-sufficing nation, we bring raw materials and products of the 
soil from distant portions of the earth and send in exchange 
the more refined products of the indoor industries, we must 
expect that manufacturing will become in larger and larger 
degree our dominant occupation. 



CHAPTER XXI 
TRANSPORTATION 

Moving things over long distances. Since all industry con- 
sists in moving materials from one place to another, it follows 
as a matter of course that transportation must form an impor- 
tant part of the industrial system. That which we call trans- 
portation differs, however, from other kinds of work in that it 
consists in moving materials over long distances, — distances 
which are measured in miles rather than in inches, feet, or 
yards. The transportation system has been likened to the veins 
and arteries of the physiological organism, just as the telegraph 
and telephone systems have been likened to the nerves. 

The development of the factory system as described in the 
preceding chapter and of large-scale production in general 
would have been impossible without cheap transportation. 

The railway and the factory have gone hand in hand in their 
development and in their economic results. With the means of 
transportation which existed two hundred years ago large industries 
would have been irripossible. The substitution of turnpikes for com- 
mon roads, of canals for turnpikes, and of railways for canals was 
as essential a part of industrial progress as was the development of 
the factory system.^ 

Without a wide market on which to sell its large product a 
large factory or manufacturing establishment would be an im- 
possibility. In the days of restricted local markets, when each 
little community was almost self -sufficing, small shops having 
individual handicraftsmen could supply the needs of each such 
unit. Not the least important of the changes which have come 
about since the middle of the eighteenth century has been the 

1 President A. T. Hadley, Transportation, in Palgrave's "Dictionary of 
Political Economy." 

303 



304 PRINCIPLES OF NATIONAL ECONOMY 

battering down of the walls which divided one restricted mar- 
ket from another and the creation of nation-wide or world-wide 
markets instead of a series of local, restricted markets. 

The widening of the market. Cheap transportation, more 
than anything else, has made possible the development of nation- 
wide and world-wide markets. Raw materials sometimes have 
to be brought long distances, especially in a case where several 
different kinds of raw material enter into the making of a given 
product. These different kinds of raw material are not always 
found in close juxtaposition. The iron ore of the Lake Superior 
region would be practically useless, because of its distance from 
the coal fields, were it not for cheap transportation on the Great 
Lakes, by means of which it can be carried almost to the mouths 
of the coal mines of Illinois, Indiana, Ohio, and Pennsylvania. 

In other cases the raw material itself is produced over such 
wide areas as to make centralized and large-scale production an 
impossibility without cheap transportation. The slaughtering 
of meat animals and the curing and packing of the meat is a 
case in point. These animals must be grown on the farms and 
ranges, which cover considerable areas. Without cheap trans- 
portation they would have to be slaughtered and consumed 
nearer the sources of production; with cheap transportation 
they may be sent to a few large packing centers, and from these 
centers the meat can be distributed over practically the whole 
country and over considerable portions of the civilized world. 
Without cheap transportation every large city would be depend- 
ent upon the supply of meat that could be grown within driving- 
distance ; that is, within such distances as the animals could 
travel on foot. They would have to be slaughtered near each 
center of consumption in order that the meat might be dis- 
tributed economically. Without cheap transportation the cot- 
ton industry of New England could never have developed to 
such proportions as it has. The raw material is all produced 
hundreds of miles, and most of it thousands of miles, away 
from the factories. The manufactured product, in turn, is dis- 
tributed over the entire country and considerable portions of 



TRANSPORTATION 305 

the civilized world. Every description of the Industrial Revo- 
lution in England gives great attention to the cotton and woolen 
industries, for it was in these industries that the transition was 
most striking. And perhaps the most striking feature was the 
long distances over which the material had to be transported 
and the wide markets in which the finished product could then 
be sold. Before the development of the railways, water trans- 
portation was the only cheap form, and England was peculiarly 
well situated with respect to ocean transportation. 

However great the economies of large-scale production may 
be, if the cost of transportation were as great as it once was, the 
small producer, using locally produced raw materials and sell- 
ing on a local market, would save so much on the cost of trans- 
portation as to give him an advantage over the biggest factory 
located a long distance away. The cheaper transportation be- 
comes, the less the saving of transportation costs will figure as 
an advantage in industry. Every industry will then tend to be 
located in the place where other advantages are greatest. When 
freight costs one cent per ton per mile, one can readily see that 
one could ship a suit of clothes weighing, say, ten pounds a long 
distance without adding perceptibly to the cost of the suit. The 
freight for a thousand miles would be only five cents. If it 
cost twenty-five cents per ton per mile, distance would be a 
very large factor in the location of a clothing industry. 

Water transportation developed first. Historically, water 
transportation was cheapened long before we had cheap land 
transportation. Consequently we find that commerce in a large 
sense developed first on the water. Great cities were located 
where there were advantages in water transportation. Consid- 
erable commerce has always been carried on, from the very 
earliest times, by means of caravans traveling over land, but 
the cost of this kind of transportation was so great that the 
commerce which developed under these conditions was neces- 
sarily confined to articles of luxury which embodied large value 
in small bulk. "The wealth of the Indies," as that term was 
used in Europe, consisted of silks, gold and silver and precious 



306 PRINCIPLES OF NATIONAL ECONOMY 

stones, and a few rare delicacies for the very rich. Some con- 
siderable cities, however, developed along these overland routes. 
Damascus and Palmyra in Western Asia, Troyes and Nurem- 
berg in Europe, may be cited as examples. But the great cities 
developed along water routes; Canton, Hankow, Calcutta, 
Delhi, Nineveh, Babylon, Bagdad, Tyre, Constantinople, Mem- 
phis, Alexandria, Venice, Genoa, Antwerp, and London may be 
cited as examples. 

Water transportation developed first, of course, where it was 
safe ; that is, on rivers or small bodies of inclosed water. The 
great rivers were the first great routes for cheap transportation. 
The valleys of the Nile, the Euphrates, the Tigris, the Ganges, 
and the Yangtse developed great civilizations, partly because 
they contained good soil and opportunities for irrigation but 
also because they furnished means of transportation. 

The keel and the compass. The next stage was reached when 
the sailors ventured beyond the mouths of the rivers along the 
adjacent coasts and in inclosed seas like the i$^gean, the Medi- 
terranean, and the Baltic. The difficulty of navigation in those 
days was such as to make an ocean voyage extremely hazardous, 
if at all possible. The boats of those early days were flat- 
bottomed (that is, they had no keels) ; it was therefore impos- 
sible to sail in the teeth of the wind. Sails could be used only 
when the wind was favorable ; that is, when it blew almost in 
the direction in which the sailors wanted to go. At other times 
they had to depend upon large numbers of oars worked by 
human muscles. The galley slave was a part of that system 
of transportation by human muscles. With the keel boat and 
the mariner's compass the use of sails was greatly enlarged, and 
sailors could venture out on the open ocean. There is some 
dispute as to the origin of the keel, but whenever or wherever 
it was invented, it must be regarded as one of the great inven- 
tions of history, for it enabled the sailor to sail almost into the 
teeth of the wind and, by skillful tacking, to go anywhere he 
wanted to, regardless of the direction of the wind. A little 
later the mariner's compass came into use, by means of which 



TRANSPORTATION 307 

the sailor could venture out of sight of land and still keep his 
bearings and reach his destination. 

With these two inventions in their possession sailors could 
now leave not only the rivers but the inclosed seas and venture 
away from the seacoasts and traverse the broad, uncharted 
ocean. Columbus never would have dared to venture on his 
quest of an ocean route to India without these two inventions. 

The world faces on the ocean. As a result of the discoveries 
of Columbus, Vasco da Gama, and others the world is said to 
have faced about. The various nations had formerly faced 
inward, with their backs to the ocean ; the land united peoples, 
but the ocean divided them. Since that time they have tended 
to face outward (that is, to face the ocean), and it is now said 
that the land divides, but the ocean unites. While distances are 
great over these ocean routes, the building of larger ships pro- 
pelled either by steam or by wind has made ocean transporta- 
tion the cheapest of all forms. Where time is not a factor the 
huge sailing vessels can carry freight thousands of miles more 
cheaply than it can be carried hundreds of miles even on our 
best railways. Where time is a factor the cost is slightly greater, 
but still ocean freight rates are amazingly low. The question of 
economizing power and that of economizing time seem some- 
times to come into conflict. The sailing vessel is the greatest 
economizer of power, but it is not economical of time. 

The order of development of water transportation has been 
described as, first, the potamic stage ; second, the thalassic ; 
and, third, the oceanic. The following outline indicates roughly 
the general types of transportation now in use : 

r Potamic 
"Water -^ Thalassic 
t Oceanic 



Transport ATiox 



f Man power 



r Paths, roads, and streets ^ Animal power 
Land ^ Railways I Mechanical power 

t Tramways 

[Air 



308 PRINCIPLES OF NATIONAL ECONOMY 

The most primitive trade routes were probably paths trav- 
ersed by human beings carrying their own loads. Beasts of 
burden were, however, utilized very early for this purpose. The 
accounts of early explorers in Central Africa describe the 
great forest as penetrated by a network of paths running from 
one village to another, so that a traveler could cross the conti- 
nent by persistently following these paths. The great caravan 
routes mentioned above, across the desert and open country, 
made use of animals as beasts of burden. 

Wheels. A wheeled vehicle is a great advance over the carry- 
ing of loads on the backs either of men or of animals. In some 
of the backward districts of China, porters still carry huge 
loads, and it is amazing what loads a man can carry who has 
been trained to it all his life. But where the road is made 
suitable for wheeled vehicles the porter can haul about three 
times as much as he can carry. On a paved street or a macad- 
amized road in this country a pair of good horses will haul from 
two to four tons, whereas about six hundred pounds is a load 
for a pack horse. Even on the common dirt roads of the coun- 
try, when they are reasonably well kept and not muddy, a pair 
of horses will haul from a ton and a half to two tons. 

Most people use roads and streets more than they use rail- 
roads, though it is difficult to say that one is more important 
than the other. They are all so interlocked and interdependent 
that it is hard to treat them separately. For short distances we 
must, of course, depend upon roads and streets, using the 
railroad for transportation over long distances and the hauling 
of heavier loads. 

Animal power. On the roads and streets man power is still 
used, as suggested above, in some backward countries. It is 
cheap only when labor is very cheap. A man can live on much 
less grain than is required to feed a horse. If a man is willing 
to live largely on a grain diet it will hardly pay him to keep a 
horse where grain is very scarce. Where the population is so 
dense that it is necessary to conserve every ounce of food, and 
men are reduced to the barest necessities of life, it is uneconomi- 



TRANSPORTATION 309 

cal to use animal power except for heavy loads which are too 
great for human muscles. Where there is land enough to pro- 
vide food not only for human beings but for animals the use of 
animal power becomes economical, because much more work 
can be done, more land cultivated, more goods transported, 
and thus the animals can be fed and still leave more to supply 
human needs than would otherwise be produced. 

Mechanical power. There is a tendency at the present time 
to substitute mechanical power for animal power even on the 
roads and streets. The development of the automobile and the 
auto truck is opening up great possibilities in this direction. 
It is not probable, however, that mechanical power will entirely 
displace animal power, any more than that animal power could 
entirely displace human power. The tendency in our civilized 
communities is for the use of human power for transportation 
purposes to be confined to shorter and shorter distances ; carry- 
ing goods from the grocer's delivery wagon to the kitchen door, 
carrying coal from the curbstone to the cellar, moving goods 
within warehouses, etc. will probably continue to be done by 
human muscles for some time to come. A similar development 
will probably take place with respect to animal power. For long 
distances and the carrying of heavy loads the auto truck will 
probably prove increasingly economical, but for short distances 
the horse is still and will probably continue for some time to 
be more economical. The economy of the auto truck, how- 
ever, depends upon the character of the roads. With the 
common dirt roads which formerly prevailed in the country it 
is doubtful if it could have been used economically even if it 
had been developed. 

Better tracks. It is interesting to note how every advance in 
methods of land transportation seems to depend upon the quality 
of the road or track. Wheeled vehicles could be substituted for 
pack saddles only when there were roads suitable for wheeled 
vehicles. Well-kept roads and paved streets are necessary 
before mechanical power can be substituted for animal power 
in ordinary hauling. The acme of track-building is the railway, 



310 PRINCIPLES OF NATIONAL ECONOMY 

where the wheeled vehicle runs on steel rails. The friction and 
loss of power between the wheel and the track is reduced to 
the minimum. In a similar way the modern locomotive is 
the climax of the development of mechanical power. Thus the 
improvement in mechanical devices goes hand in hand with the 
improvement in road or track. Ever since the first building of 
railways and the use of locomotive engines this parallel de- 
velopment has continued. The first locomotives were small and 
crude affairs as compared with the magnificent engines which 
now haul our freight and passenger trains. The powerful en- 
gines of today, however, could scarcely run on the old-fashioned 
railway track, with its light iron rails. Improvement in the 
manufacture of the steel rail has had to go hand in hand with 
the improvement of the locomotive engine. 

Railways. It may seem strange to young people to be told 
that there are men now living who can remember when there 
were no railways. Such men^ of course, are now somewhat 
rare, but the fact remains that the present age of the railway 
does not exceed the span of a reasonably long human life. The 
railway mileage of the world has increased by leaps and bounds. 
In no country has the development of the railway kept pace 
with its development in the United States, though in proportion 
to their need for railway transportation England and Germany 
have kept close behind us. Our area is so vast and our people 
have been spreading so rapidly over this vast area that a 
great demand for transportation facilities has been created. In 
addition we have had an abundance of material for their con- 
struction. Moreover, our people have shown a great deal of 
initiative and enterprise in pushing the business. In some 
countries this spirit of enterprise has been so lacking that the 
governments themselves have had to take hold of the matter 
and build the roads at government expense. 

Public or private railways. The problem of railway manage- 
ment, however, has been a very difficult one in every country. 
In one sense the railway system would seem to belong to the 
general system of streets, roads, and highways. The general 



TRANSPORTATION 311 

experience of mankind has shown that streets, roads, and high- 
ways should be public rather than private. This has led to the 
assumption that railways should be treated similarly. There 
is, however, this important difference. On the streets, roads, 
and highways private individuals use their own vehicles, travel 
freely, and go and come when they please. The actual work of 
transportation, therefore, is not carried on by the public. This 
method would be impossible on a railway. The trains must 
run on schedule time and under a well-administered system ; 
otherwise there would be nothing but confusion and inefficiency 
and multitudinous wrecks. If the public undertakes to own the 
railways it would have to go much farther than it does when it 
owns the streets and highways. It would either have to operate 
all the vehicles (that is, trains) or lease the road to a single 
company which would have the exclusive use of the tracks. 
Obviously even two independent individuals or companies could 
not operate trains on the same track. There are, therefore, two 
analogies which may be drawn between the highway system 
and the railway system. Since the government owns the high- 
ways one group of people, reasoning by analogy, say that the 
government ought to own the railways. On the other hand, it 
is asserted that since private individuals operate the vehicles 
that are used on the highways, and the government is not in the 
transportation business at all, a similar rule should prevail with 
respect to railway transportation — private individuals or com- 
panies should do the hauling and therefore own the railway. In 
this country we have followed the latter principle, but it has 
made necessary a considerable regulation of the companies 
which do the hauling. A third possibility is that the govern- 
ment should build and own the tracks and then lease them to 
operating companies. 

Monopolistic character of a railway. From the very nature 
of the case a railway must be operated as a monopoly or quasi 
monopoly. As suggested above, it would be impossible for even 
two companies to run trains on the same track or over the same 
railway system unless one became absolutely subject to the 



312 PRINCIPLES OF NATIONAL ECONOMY 

administrative rules of the other. This quasi-monopolistic char- 
acter of the railway has given the management more control 
over rates than individual draymen, freighters, cabmen, etc. can 
exercise over freight and passenger rates in the vehicles that are 
operated on public highways. In order to hold in check this 
quasi-monopolistic power of the railway a great deal of legisla- 
tion has been enacted in this country, beginning with the granger 
laws of the seventies and eighties of the last century and cul- 
minating in the Interstate Commerce Act of 1887 and the sub- 
sequent development of the powers of the Interstate Commerce 
Commission. This commission now has power to prescribe 
rates and to exercise general control and supervision over the 
administration of all the railways of the country. 

Short-distance and long-distance hauling. In several coun- 
tries, such as Germany^ Switzerland, Australia, and others, the 
opposite alternative has been chosen. The government has 
built and continues to operate the railways. In Germany it was 
primarily a military enterprise ; in order that she might build 
up her military power and be able to concentrate vast armies 
and supply them at any point, she needed a well-articulated 
railway system. In this respect her policy resembled that 
of the Romans, who were great road builders in their day. 
Their system of roads enabled them to march their armies 
rapidly from one part of the Empire to another, to concentrate 
wherever concentration was needed, and thus to outmaneuver 
their enemies. 

As to the effects of the two systems on peaceful commerce, 
there are many different opinions. In some respects freight 
rates are more favorable in Germany than in the United States ; 
in others they are much more favorable in the United States. 
No railway system in the world compares with that of the 
United States in the cheapness and swiftness of long-distance 
freight. Our railways, however, have given comparatively little 
attention to local freight. In the efficiency and cheapness with 
which local freight is handled they are far behind the railroads 
not only of Germany, where the government owns and operates 



TRANSPORTATION 313 

the roads, but also of England, where they are operated by 
private companies. The difference, therefore, is probably not 
to be accounted for on the ground of public or private owner- 
ship. In a densely populated country, where the distances are 
never very great, it would be quite natural that short-distance, 
or local, freight should form a large part of the business of the 
railroad ; whereas in a country of such vast expanse as ours 
it would be equally natural that long-distance freight should 
form the chief part of the railroad business. Each railway 
system^ therefore, tends to specialize in that field where its chief 
business lies. 

Arguments against both sides. No final conclusion is possi- 
ble as to the relative merits of public and private management. 
As Sir Roger de Coverley was in the habit of saying, ''Much 
might be said on both sides." Each side has its partisans, and 
each partisan seems peculiarly unable to appreciate the weak- 
nesses of his own side and the strong points on the opposite side. 
In reading these arguments one gets the impression that there is 
very little to be said in favor of either, but much that can be said 
against both. The arguments against private ownership and 
operation are based mainly on the monopolistic character of the 
railroad business, the rapacity of railroad managers, and the 
general distrust of ''big business." The arguments against pub- 
lic ownership and' operation are based mainly upon the ineffi- 
ciency of public business, the danger that politics rather than 
business needs will determine rates and other details of the 
business, and the general distrust of the politician. 

These considerations might very properly convince one that 
the same system is not necessarily the best for all countries. In 
a country which is dominated by autocratic and military stand- 
ards, where business is contemptuously spoken of as "shop- 
keeping," where government service attracts a better class of 
men than business attracts, and where men are chosen for high 
positions not because of their talkativeness or popularity but 
because of their knowledge and efficiency, the objections to 
public ownership and operation are weak and those against 



314 PRINCIPLES OF NATIONAL ECONOMY 

private ownership and operation are weighty. In a country, 
however, which is dominated by democratic ideals, where busi- 
ness and all honest occupations have always been regarded as 
just as honorable as government or mihtary service, where, on 
the whole, business attracts a better class of men than politics, 
and where men are chosen for high public positions mainly on 
the ground of their ability to make stump speeches rather than 
on the ground of their knowledge and efficiency, the objections 
to government ownership and operation are very strong and 
those against private ownership and operation are relatively 
weak. There is a strong probability, however, that the persua- 
sive talkers will be able to enlarge their powers, at the expense 
of the efficient doers, by persuading the voters to intrust more 
and more power to them, the talkers. 



CHAPTER XXII 

MERCHANDISING 

Personal utility. In a previous chapter it was pointed out 
that three kinds of utility are produced by human industry, — 
form utihty, place utility, and time utility. It would be pos- 
sible, if one cared to draw somewhat finer distinctions, to 
speak of personal utility as a special phase of place utility, or, 
on the other hand, personal utility could be named as a fourth 
kind. When an object is transferred from a person who has 
no use for it to a person who has a use for it, its utility, or 
power to satisfy desires, is increased by the transfer, just as 
truly as though it were transferred from a locality where it is 
not needed to a locality where it is needed. 

There is an ancient fallacy to the effect that someone must 
gain and someone must lose in every trade. This fallacy has 
been exploded so often that it hardly seems necessary to repeat 
the process here. Two farmers may trade horses and both gain. 
A wool-grower who has a surplus of wool and a shoemaker who 
has a surplus of shoes may exchange products to the advantage 
of both. A boy who has a surplus of marbles but a deficit of 
taffy might advantageously exchange some of his surplus 
marbles for taffy, carrying on the exchange with another boy 
who had a surplus of taffy but a deficit of marbles. By this 
process the personal utility of both marbles and taffy would 
be increased. 

Merchandising may be productive of utility. If it is agreed 
that the power of goods to satisfy wants is increased when 
they get into the possession of the people who really need 
them, it ought not to be difficult to see that the individual 
who facilitates this process is a productive individual ; that is, 

315 



31 6- PRINCIPLES OF NATIONAL ECONOMY 

his work results in increased utility. Even if we leave trans- 
portation and the storing of goods out of account for the pres- 
ent and consider merely the transfer of goods from one person 
to another in the same locality, we shall find that unless there 
were merchants or mercantile houses the various producers 
would find difficulty in making the necessary exchanges. The 
farmer with a surplus of wheat might have some difficulty in 
finding a shoemaker who wanted wheat and was willing to 
exchange shoes for wheat. Under a highly developed mercan- 
tile system a farmer can always find, buyers for his wheat. 
He can also find a shoe store where he can buy shoes, a clothing 
store where he can buy clothing, and so on. 

These men who specialize in trading are sometimes called 
middlemen, and it is not difficult to see that they are not only 
exceedingly useful but in some cases absolutely necessary. It 
may sometimes happen that too many middlemen intervene 
between the producer and the consumer, but some middlemen 
are absolutely necessary unless the producer will undertake to 
peddle his products around among consumers or unless the 
consumers will undertake to search for producers who have 
for sale exactly what they (the consumers) desire to purchase. 
An immense amount of time and trouble is saved when every 
producer can sell directly to a middleman and go on about his 
work of production, while at the same time every consumer can 
purchase exactly what he wants from some merchant. 

The middleman as a timesaver. Generally speaking, it will be 
observed that in any community where the average person con- 
siders his time to be valuable, there are a great many middle- 
men intervening between producers and consumers and very 
little direct marketing. In a community, however, where wages 
and incomes are low and the average person finds his time of 
very little value, comparatively few middlemen intervene be- 
tween producer and consumer, and there is a great deal of 
direct bartering. The open market place, where producers and 
consumers meet, flourishes in communities of the latter type 
but not in communities of the former type. 



MERCHANDISING 317 

There is an old adage that time is money. Where time is 
valuable it is economized ; where it is of little value it is 
not economized. Where the average housekeeper considers her 
time valuable she does not care to spend much time marketing 
and dickering with producers who bring their stuff to market. 
She prefers to market by telephone. This is a great saving of 
time, but it is generally Expensive in terms of money. She is 
literally paying somebody else to do for her that which she 
might do for herself if she cared to go to market and deal 
directly with the producers. Similarly, where the producer con- 
siders his time valuable he would prefer to sell his product in 
bulk to some middleman rather than to spend his time in dicker- 
ing with consumers and selling his product in small lots. The 
system of direct marketing saves money, it is true, but it wastes 
time; the system of indirect marketing saves time but, in a 
sense, wastes money. The problem in economy which every 
producer and every consumer must decide for himself is whether 
his time is worth as much as the money which he might other- 
wise save. 

The peasant women of certain overcrowded countries, who 
are unable to do farm work and have very little else in the way 
of remunerative work which they can do, find going to market 
a means of saving money. They can sell directly to the con- 
sumers and cut out middlemen's costs and profits. Since they 
consider their time as worth practically nothing, every penny 
which they can save in this way adds so much to the family 
income. The American farmer, with a somewhat higher stand- 
ard of living, and the farmer's wife, who considers her time as 
worth something, if not for earning money by remunerative 
work, at least for housekeeping or self-cultivation, refuses to 
spend her time in this way. Therefore it is very difficult in 
this country to maintain a system of direct marketing. It is 
the belief, however, of many students of the problem that 
the Americans have gone too far in the direction of saving 
time, — so far, in fact, as to waste more money than necessary 
in middlemen's costs and profits. 



3i8 PRINCIPLES OF NATIONAL ECONOMY 

Marketing sometimes a social function. Another factor en- 
ters into the success of pubhc markets, where producer and 
consumer meet. In those countries where the system still pre- 
vails, going to market has become a social function. The 
market place is the place where citizens meet and where the 
women make their social calls and pay their social obligations. 
This phase of the question has played a very important part in 
history. The Roman Forum, for example, was simply the 
market place, in which the farmers from the surrounding coun- 
try and the people of the city of Rome met, primarily for 
purposes of exchange and secondarily for purposes of social 
intercourse and political discussion. The latter functions grad- 
ually displaced the former, and the Roman Forum gradually 
became the center of Roman politics and eventually the center 
of the world. The Olympic games, which were for many cen- 
turies the center of Greek life, developed in connection with a 
fair which was held for the exchange of products. While the 
Greek people were busy with their exchanges the young men 
took part in athletic and intellectual contests ; eventually these 
contests became the chief feature, and the mercantile function 
almost disappeared from sight. 

The social function of going to market has been revived in a 
number of ways in recent times. Great department stores, in 
order to attract trade, — especially that of ladies who have time 
for social diversion, — have introduced the paraphernalia of the 
drawing room, with pink teas and other accessories. They are 
deliberately striving to make afternoon shopping a social diver- 
sion, thus restoring, in the field of the marketing of frills, some 
of the features which originally developed in connection with 
the marketing of the necessaries of life. 

Buying large quantities and selling in small parcels. Another 
very important function performed by the mercantile house is 
that of receiving products in large quantities from the producer 
and dividing them into small parcels for the consumer. This 
breaking up into small parcels is a work of utility ; it meets the 
convenience of both producer and consumer. The convenience 



MERCHANDISING 319 

of the producer is met by his abihty to sell in bulk ; the con- 
venience of the consumer is met by his ability to buy in small 
parcels. This may, without doing violence to our language, be 
called a kind of form utility. The goods are bought in one 
form and sold in another. There is a certain analogy between 
this process of breaking goods up into small parcels and the 
process of manufacturing, in which the forms of goods are 
changed in other ways. 

Storing goods. One of the most important functions of the 
mercantile class, however, is that of storing goods. In fact, it 
is still customary to speak of certain mercantile houses as 
stores. The storing of goods produces time utility. They are 
kept from a point in time when they are not especially needed 
until a time when they are especially needed. Their utility is 
thus increased. This function of storing goods is particularly 
important in the case of goods which are produced by a seasonal 
industry, such as agriculture. The wheat is harvested during 
one period of the year, but needs to be consumed during the 
entire year. Unless someone were ready to store this product, 
it would have to be used very inefficiently at one period of the 
year, and there would be a scarcity at another period. 

Utility of storing without monopolizing. Contrary to a cer- 
tain popular belief, the effect of storing vast quantities of farm 
products in warehouses is beneficial rather than otherwise. No 
speculator or warehouse owner would have any motive for 
storing products except that of getting a higher price later. 
He could not get a higher price later unless the goods were 
scarcer later. If they are scarcer later it is very much to the 
interest of society that they be stored rather than consumed at 
once. During the period of high prices accompanying the 
World War — say in May, 191 7 — it was found that a great deal 
of grain was being stored up. There naturally developed a cer- 
tain popular dissatisfaction. Being shortsighted, we did not 
appreciate what was likely to be our situation several months 
later. The only thing we saw was that prices were distressingly 
high. We saw this in connection with another fact; namely, 



320 PRINCIPLES OF NATIONAL ECONOMY 

that large quantities of wheat were being stored. We thought, 
naturally enough, that if that wheat were taken out of storage 
and sold at once, prices would not be so high. If, however, we 
had been a little more farsighted we should have looked ahead 
and considered what the situation would be later. If wheat is 
going to be more abundant at some time in the future than now 
the price will fall. If that were the expectation nobody would 
be willing to store a single bushel of wheat until that time. 
Everybody would want to sell his wheat at once. If those who 
are in a position to judge believe that wheat will be scarcer in 
July than in May, and the price therefore higher, they find it to 
their interest to store up these products and hold them. If they 
are correct in their anticipation it is also very important for 
society at large that they, or somebody, should store up wheat ; 
otherwise we should consume wastefully this month and go 
hungry later on. It ought not to take very much forethought or 
reasoning power to understand this. It is, however, a sad com- 
mentary on the shortsightedness of many of our people and 
even of men in high political positions that this is so imperfectly 
understood and that we are so generally resentful toward those 
who are performing this important function of storing. 

Another fact which should be taken into consideration is that 
formerly large numbers of people, both producers and con- 
sumers, did their own storing, whereas at the present time that 
work is turned over to a special group of men who own eleva- 
tors, cold-storage warehouses, and other storage facilities. In 
a less highly organized state of society many farmers saved 
grain in their own bins, and potatoes, fruit, and vegetables in 
their own cellars. At the same time many consumers bought 
supplies in advance and stored them in their own cellars. At 
the present time comparatively few farmers hold their prod- 
ucts, finding it cheaper to sell them as soon as produced than to 
build and maintain their own storehouses and run their own risk 
of loss or deterioration of the products. Moreover, consumers 
have generally got out of the habit of buying supplies in ad- 
vance and keeping them stored until needed, finding it cheaper 



MERCHANDISING 321 

to order supplies as they are needed, depending upon other 
people to do the storing. While both producer and consumer 
are turning this v/ork over to a special class, they must not 
forget that the only motive which this special class has for do- 
ing this special work is the hope of a profit. If they can make 
a profit and still furnish the service cheaper than producers 
and consumers can furnish it for themselves, they have earned 
their profit. 

Cornering, or monopolizing, is destructive of utility. We 
should be careful, however, to distinguish between storing for 
sale on a competitive market and monopolizing for sale on what 
is known as a cornered market. If there were collusion among 
all those who own warehouses or who are in a position to store 
products, — an agreement to control the supply and fix prices 
artificially, — there would be a real grievance, and the individ- 
uals who are guilty of such a practice should, of course, be very 
severely dealt with. But if we can once satisfy ourselves that 
the products are being stored for sale on a competitive market, 
we can rest perfectly easy in our minds, because no one could 
make any money by storing in this way unless it were genuine 
social service to do so. By social service, of course, we do not 
mean philanthropic service, but merely useful work. 

Standardization. Another very important function performed 
by the mercantile class is what is known as the classification, 
or standardization, of goods. The producer of farm products 
especially cannot produce goods of uniform kind and quality. 
On every apple tree there will be apples of various grades, and 
in every large orchard likewise. In every poultry yard there 
will be fowls of different qualities. The consumer who tried to 
purchase directly from the farm might not find exactly the 
grade or quality which he desired. When the farmer sells his 
products in bulk the middleman will frequently classify or 
grade them into a large number of grades. Take such a simple 
product, for example, as broilers. It is very difficult for one 
poultryman to produce a large number of broilers all of the 
same size, weight, quality, and general condition. A hotel or 



32 2 PRINCIPLES OF NATIONAL ECONOMY 

restaurant; however, wishes to treat all customers alike. It does 
not wish to buy broilers in a nondescript, or ungraded, mass. 
If it did so one customer would get one kind of dish and another 
customer another kind, varying in size and quality. This would 
produce dissatisfaction. A dealer buys broilers from a large 
number of poultrymen and classifies them very minutely. 
There are said to be over one hundred different grades and 
classes. Each hotql and restaurant and every private consumer 
can get from such a dealer exactly what he wants. Multitudes 
of other illustrations could be given, but enough has been said 
to show that merchandising is a very important factor in the 
economy of human energy and the promotion of national 
prosperity. 

Deception always destruction. It is quite certain, however, 
that certain practices will grow up in connection with merchan- 
dising which are reprehensible. The ancient Greeks regarded 
Hermes, or Mercury, not only as the herald of the gods but 
also as the god of boundaries, markets, and weights and meas- 
ures, and as the special patron of merchants, gamblers, and 
thieves. There is probably no branch of human industry or 
business which lends itself so easily to deception and adultera- 
tion and which furnishes such temptations to high-pressure ad- 
vertising and salesmanship. The old adage that honesty is the 
best policy is doubtless appreciated by merchants of the better 
class, but unfortunately there are always a good many men who 
are doing some kind of merchandising to whom this adage 
seems more theoretical than practical. The arts of persuasion 
are developed to a high degree of proficiency and pass easily 
over into the arts of deception. The justification given is gen- 
erally summed up in the words "business is business." It is 
not necessary to present any arguments to show that deception 
contributes nothing to national prosperity. What one gains by 
deception, someone else necessarily loses. It is probably this 
phase of the question that has led to the hasty conclusion, which 
is far too widely accepted, that somebody always loses in a 
trade. That general conclusion was combated at the beginning 



MERCHANDISING 323 

of this chapter. In so far as trading takes the form of decep- 
tion, however, the conclusion is entirely justified. 

Advertising. Advertising occupies a prominent place among 
the forms in which the art of persuasion is carried to a high state 
of development in modern times. To what extent advertising is 
economically justified has been a difficult question and must re- 
main so. Advertising is sometimes educational. The individual 
sometimes learns the price of things from advertisements, also 
where he can get something which he really wants and has 
wanted for a long time. Without the advertisement he might 
have found difficulty in getting it. This applies, however, mainly 
to new products that have recently been put upon the market. 
One scarcely needs an advertisement to tell one of the existence 
of soap or codfish or to acquaint one with the fact that such 
things are to be purchased at stores. In many cases of this kind 
the only effect of advertising is to persuade the consumer to use 
one man's product rather than another's. One producer realizes 
that if he does not advertise, consumers may buy the other 
man's product. The other man is then compelled to advertise 
in order to defend himself against the first advertiser, and thus 
it becomes a race, or contest, to get the customer's trade, and 
no addition whatever is made to the national wealth or to the 
well-being of society. It is not improbable that eventually the 
public will exercise its authority and use its power of com- 
pulsion to limit or redirect the advertising business. This, 
however, would be a somewhat dangerous experiment, because 
such public authority would have to be exercised by public offi- 
cers. The worst forms of advertising are not found among mer- 
chants but among candidates for public office. The man who 
has succeeded in getting elected to office by campaigning, which 
is a kind of advertising, is not necessarily the best man to de- 
cide upon what is good and what is bad advertising either in 
political campaigning or in merchandising. 



CHAPTER XXIII 
PERSONAL AND PROFESSIONAL SERVICES 

Causing productivity in others. Falstaff said, " I am not only 
witty in myself, but the cause that wit is in other men." There 
are many men and women in every community who are not 
directly producing wealth, but who are the cause of produc- 
tivity in others. The teacher who trains students in the pro- 
ductive arts is, to say the least, a cause of productivity and 
becomes a contributor to national prosperity. The singer, the 
poet, and the artist who inspire to strenuous action and noble 
deeds likewise contribute their share to the greatness of the 
nation. The military band is a part of the fighting strength of 
the army, even though its members never handle a destructive 
weapon of any kind. 

The teacher, the preacher, the musician, the poet, and the 
artist, however, sometimes forget their function in a great 
nation and at times seem almost to imagine that they are the 
objects for which the nation exists. At any rate they have been 
known to go so far as to resent the idea that they have a purpose 
beyond that of contributing to knowledge for its own sake or 
art for its own sake. 

The social function of art, religion, etc. Quite different was 
the attitude of a great French artist when he found his country 
in the throes of the life-and-death struggle which began with 
the invasion of 19 14. Speaking before a gathering of French 
artists, he said that in that crisis no art would be tolerated 
"which was not noble, robust, proud, and an inciter of high 
thoughts and delicate sentiments — an art of heroic joy." Fac- 
ing the future, he continued: "You would not tolerate any- 
thing less today. Then why should you tolerate anything less 

324 



PERSONAL AND PROFESSIONAL SERVICES 325 

hereafter, in that tomorrow when our duties shall be changed ?" 
Here was a full acceptance of the view that art has an end 
beyond itself and is not its own excuse for being. 

Upon this topic the words of Thomas Carlyle are not only 
instructive but inspiring as well: 

Two men I honor, and no third. First, the toilworn Craftsman 
that with earth-made Implement laboriously conquers the Earth, and 
makes her man's. Venerable to me is the hard Hand ; crooked, 
coarse, wherein notwithstanding lies a cunning virtue, indefeasibly 
royal, as of the Scepter of this Planet. Venerable too is the rugged 
face, all weather-tanned, besoiled, with its rude intelligence ; for it 
is the face of a Man living manlike. O, but the more venerable for 
thy rudeness, and even because we must pity as well as love thee! 
Hardly-entreated Brother ! For us was thy back so bent, for us were 
thy straight limbs and fingers so deformed : thou wert our Conscript, 
on whom the lot fell, and fighting our battles wert so marred . . . 

A second man I honor, and still more highly : Him who is seen 
toiling for the spiritually indispensable ; not daily bread, but the 
bread of Life. Is not he too in his duty ; endeavoring towards in- 
ward Harmony ; reveahng this, by act or by word, through all his 
outward endeavors, be they high or low? Highest of all, when his 
outward and his inward endeavor are one : when we can name him 
Artist ; not earthly Craftsman only, but inspired Thinker, who with 
heaven-made Implement conquers Heaven for us ! If the poor and 
humble toil that we have Food, must not the high and glorious toil 
for him in return, that he have Light, have Guidance, Freedom, 
Immortality? — These two, in all their degrees, I honor: all else is 
chaff and dust, which let the wind blow whither it listeth. 

Government. The officers of the government who preserve 
order and protect lives and property contribute a large share to 
national prosperity. An army, whose business may seem to be 
destruction rather than production, by protecting against inva- 
sion from without and insurrection and disorder from within 
may be an indispensable factor in prosperity. 

It is, of course, possible to have too many so-called non- 
producers, not only in the army but in public offices of different 



32 6 PRINCIPLES OF NATIONAL ECONOMY 

kinds as well as in the various talking and ornamental profes- 
sions. The work of the soldier, for example, is one of the most 
honorable of all professions so long as national defense is neces- 
sary, but even the professional soldier himself will generally 
agree that it would be an excellent thing if war could be elimi- 
nated and the work of the soldier made unnecessary. The same 
reasoning may be applied to many other occupations. No work 
is more beneficent and honorable than that of the physician ; 
but every physician, if he be worthy of the name, is working for 
the elimination or prevention of disease. If it were possible to 
carry this work to completion it would greatly reduce the need 
for physicians. Litigation among the citizens of the nations is, 
so far as it goes, almost as wasteful as war between nations. 
If it could be eliminated it would greatly reduce the demand for 
lawyers. An army of very able and talented men would thus be 
released for other kinds of work for which the need persists. 
The best lawyers, like the soldiers and physicians, frankly 
recognize this and are willing to work to reduce the amount 
of litigation. 

Productive and unproductive labor. Economists have gener- 
ally recognized a distinction between productive and unproduc- 
tive labor, but they have not always agreed as to the line of 
division. Adam Smith ^ wrote: 

There is one sort of labor which adds to the value of the subject 
upon which it is bestowed : there is another which has no such effect. 
The former, as it produces a value, may be called productive ; the 
latter, unproductive labor. Thus the labor of a manufacturer adds, 
generally, to the value of the materials which he works upon, that of 
his own maintenance, and of his master's profit. The labor of a 
menial servant, on the contrary, adds to the value of nothing. 
Though the manufacturer has his wages advanced to him by his 
master, he, in reality, costs him no expense, the whole of those wages 
being generally restored, together with a profit, in the improved value 
of the subject upon which his labor is bestowed. But the mainte- 
nance of a menial servant never is restored. A man grows rich by 

iThe Wealth of Nations, Vol. I, pp. 332-334- Clarendon Press, Oxford, 1880. 



PERSONAL AND PROFESSIONAL SERVICES 327 

employing a multitude of manufacturers : he grows poor by main- 
taining a multitude of menial servants. The labor of the latter, how- 
ever, has its value, and deserves its reward as well as that of the 
former. But the labor of the manufacturer fixes and realises itself 
in some particular subject or vendible commodity, which lasts for 
some time at least after that labor is past. It is, as it were, a certain 
quantity of labor stocked and stored up to be employed, if necessary, 
upon some other occasion. That subject, or, what is the same thing, 
the price of that subject, can afterwards, if necessary, put into motion 
a quantity of labor equal to that which had originally produced it. 
The labor of the menial servant, on the contrary, does not fix or 
realise itself in any particular subject or vendible commodity. His 
services generally perish in the very instant of their performance, and 
seldom leave any trace or value behind them, for which an equal 
quantity of service could afterward be procured. 

The labor of some of the most respectable orders in society is, 
like that of menial servants, unproductive of any value, and does not 
fix or realise itself in any permanent subject, or vendible commodity, 
which endures after that labor is past, and for which an equal 
quantity of labor could afterwards be procured. The sovereign, for 
example, with all the officers both of justice and war who serve under 
him, the whole army and navy, are unproductive laborers. They are 
the servants of the public, and are maintained by a part of the annual 
produce of the industry of other people. Their service, how honor- 
able, how useful, or how necessary soever, produces nothing for which 
an equal quantity of service can afterwards be procured. The pro- 
tection, security, and defence of the commonwealth, the effect of 
their labor this year, will not purchase its protection, security, and 
defence for the year to come. In the same class must be ranked some 
both of the gravest and most important, and some of the most friv- 
olous professions : churchmen, lawyers, physicians, men of letters 
of all kinds ; players, buffoons, musicians, opera-singers, opera- 
dancers, etc. The labor of the meanest of these has a certain value, 
regulated by the very same principles which regulate that of every 
other sort of labor, and that of the noblest and most useful produces 
nothing which could afterwards purchase or procure an equal quantity 
of labor. Like the declamation of the actor, the harangue of the 
orator, or the tune of the musician, the work of all of them perishes 
in the very instant of its production. 



328 PRINCIPLES OF NATIONAL ECONOMY 

Both productive and unproductive laborers, and those who do no 
labor at all, are all equally maintained by the annual produce of the 
land and labor of the country. This produce, how great soever, can 
never be infinite, but must have certain limits. Accordingly, there- 
fore, as a smaller or greater proportion of it is in any one year 
employed in maintaining unproductive hands, the more in the one 
case and the less in the other will remain for the productive, and the 
next year's produce will be greater or smaller accordingly ; the whole 
annual produce, if we except the spontaneous productions of the 
earth, being the effect of productive labor. 

John Stuart MilP makes use of the same distinction in the 
following paragraphs, though he modifies it so as to allow for 
labor which is mediately, or indirectly, productive. 



LABOR IS INDIRECTLY AS WELL AS DIRECTLY PRODUCTIVE 

I shall therefore, in this treatise, when speaking of wealth, under- 
stand by it only what is called material wealth, and by productive 
labor only those kinds of exertion which produce utilities embodied 
in material objects. But in limiting myself to this sense of the word, 
I mean to avail myself to the full extent of that restricted accepta- 
tion, and I shall not refuse the appellation productive to labor which 
yields no material product as its direct result, provided that an in- 
crease of material products is its ultimate consequence. Thus, labor 
expended in the acquisition of manufacturing skill, I class as pro- 
ductive, not in virtue of the skill itself, but of the manufactured 
products created by the skill, and to the creation of which the labor 
of learning the trade is essentially conducive. The labor of officers 
of government in affording the protection which, afforded in some 
manner or other, is indispensable to the prosperity of industry, must 
be classed as productive even of material wealth, because without it, 
material wealth, in anything like its present abundance, could not 
exist. Such labor may be said to be productive indirectly or medi- 
ately, in opposition to the labor of the ploughman and the cotton 
spinner, which are productive immediately. They are all alike in this, 

1 Principles of Political Economy (from the fifth London edition), Bk. I, 
chap, iii, p. 76. New York, 1909. 



PERSONAL AND PROFESSIONAL SERVICES 329 

that they leave the community richer in material products than they 
found it ; they increase or tend to increase material wealth. 

By unproductive labor, on the contrary, will be understood labor 
which does not terminate in the creation of material wealth ; which, 
however largely or successfully practised, does not render the com- 
munity and the world at large richer in material products, but poorer 
by all that is consumed by the laborers while so employed. 

All labor is, in the language of political economy, unproductive, 
which ends in immediate enjoyment, without any increase of the 
accumulated stock or permanent means of enjoyment. And all labor, 
according to our present definition, must be classed as unproductive, 
which terminates in a permanent benefit, however important, pro- 
vided that an increase of material products forms no part of that 
benefit. The labor of saving a friend's life is not productive, unless 
the friend is a productive laborer, and produces more than he 
consumes. To a religious person the saving of a soul must appear 
a far more important service than the saving of a life ; but he will 
not therefore call a missionary or a clergyman productive laborers, 
unless they teach, as the South Sea Missionaries have in some cases 
done, the arts of civilization in addition to the doctrines of their 
religion. It is, on the contrary, evident that the greater number 
of missionaries or clergymen a nation maintains, the less it has to 
expend on other things ; while the more it expends judiciously in keep- 
ing agriculturists and manufacturers at work, the more it will have 
for every other purpose. By the former, it diminishes, cceteris paribus, 
its stock of material products ; by the latter it increases them. 

Both these eminent writers seem to look upon the production 
of vendible commodities, either directly or indirectly, as the 
end of economic activity. From that point of view even cheap 
and tawdry articles which are of no use to anyone, as a puritan- 
ical moralist would say, are nevertheless wealth, and the labor 
which produces them is productive labor. On the other hand, 
the philosopher who elevates our thoughts above the plane 
where such things are enjoyed would be an unproductive la- 
borer, and yet this philosopher might be doing infinitely more 
for the ultimate prosperity and greatness of the nation than the 
manufacturer of such articles. 



330 PRINCIPLES OF NATIONAL ECONOMY , 

There is, however, something finely democratic in the attitude 
of these writers. It assumes that whatever the people want, as 
expressed either by their votes or by their purchases, they are 
entitled to have and that no one, not even the philosopher, 
should set himself up as a moral censor. Their judgment, as 
expressed through their purchases of vendible commodities, is 
the final word in such matters. Only such labor as supplies, 
either directly or indirectly, things which the people are willing 
to purchase is to be regarded as productive according to their 
point of view. 

Distinction similar to that between producers' and consumers' 
goods. Another and more satisfactory way of looking at this 
distinction between productive and unproductive labor is to 
compare it with the distinction between producers' and con- 
sumers' goods. It would not occur to anyone that a writer was 
disparaging bread if he were to say that it is a consumers' good 
and not a producers' good. To say that a sewing machine is a 
producers' good, while a coat is a consumers' good, is not neces- 
sarily to place the machine in a superior class and the coat in 
an inferior class. And yet to say that a coat is a consumers' 
good may mean very much the same as to say that it is an un- 
productive good. In the above passage Mill distinctly states 
that unproductive labor is not necessarily useless labor. 

Much of that which these writers include under unproductive 
labor may, however, be productive even in the technical sense 
in which they use that word. A menial servant, for example, 
who saves the time of his employer and enables him to devote 
his energies exclusively to highly productive work really con- 
tributes to the production of vendible commodities, even though 
he himself has no direct connection with any such article ; but 
if a menial servant or anyone else merely helps a man of lei- 
sure to while away his idle hours by furnishing amusement 
or entertainment, his work can scarcely be called productive 
in any sense. 

Wherein labor contributes to national prosperity and wherein 
it does not. After all, the important distinction is not between 



PERSONAL AND PROFESSIONAL SERVICES 331 

the labor which produces vendible commodities and that which 
does not. The distinction of real importance is that between 
labor which contributes to the well-being, prosperity, and 
greatness of the nation and that which does not. Labor may 
produce a commodity which sells for a high price on the market, 
— which satisfies an intense desire which people will pay a high 
price to have gratified ; and yet, if the desire is a vicious one, 
if its gratification weakens in mind or body those who buy the 
commodity, or if it merely incapacitates them temporarily for 
useful work, that labor would have to be classed as unproduc- 
tive. On the other hand, the labor of the musician, the poet, or 
the preacher, if it does not tend to produce softness but inspires 
to strenuousness and productivity, if it rationalizes the con- 
sumption of wealth, if it makes people desire the right things, 
would have to be classified as highly productive. To be sure, a 
book, a poem, or a picture is a vendible commodity, and its 
producer would be called a productive laborer, under the classic 
definition. If one wanted to insist upon it one might go so far 
as to say that the sound waves produced by the musician or 
the talker are also material things and vendible, but it is not 
necessary to go so far as that. 

This distinction not so clear as the other. One disadvantage 
in the position which we are taking — in favor of the view that 
the important distinction is that between labor which adds to the 
well-being of the nation and labor which does not — is that it 
leaves a great deal to the opinion of the student. Whether labor 
produces a vendible commodity or not is generally a question 
of ascertainable fact. Whether it is good for the nation or not 
is sometimes a matter of opinion. There could scarcely be any 
denial, for example, that a distillery produced a vendible com- 
modity, but there has been a great deal of difference of opinion 
as to whether it was a benefit or an injury to the nation. On the 
other hand, it could scarcely be claimed that a moral leader who 
persuaded people to become total abstainers was producing vend- 
ible commodities, but there are those who hold to the opinion 
that he is contributing to the general well-being of the nation. 



332 PRINCIPLES OF NATIONAL ECONOMY 

Granting the advantage, from the standpoint of clearness, of 
the classical distinction between productive and unproductive 
labor, the present writer nevertheless contends that the dis- 
tinction between that labor which is beneficial and that which 
is not is much more important. Probably as large a proportion 
of the labor which is engaged in producing material commodi- 
ties for the market is wasted as of the labor which is not so 
engaged. Probably as large a proportion of that labor which is 
not engaged in producing material commodities is advantageous 
to the nation as of that which is so engaged. The prosperity 
and well-being of the nation will depend upon the proportion 
of the people who are doing useful work rather than upon the 
proportion that are producing material commodities. 

All labor which is not engaged in the production or handling 
of material commodities which are bought and sold on the 
market is grouped, not only in this chapter but in various 
census reports and other public documents, as professional 
and personal service. Professional service is limited to a few 
learned or highly skilled occupations, such as law, medicine, 
theology, teaching, governing, acting, etc. Personal service in- 
cludes such a multitude of occupations as would fill a small 
catalogue. Barbers, bootblacks, valets, domestic servants, and 
all others who render their service directly, rather than indi- 
rectly through the medium of a material product, may be said 
to render personal service. If it is genuine service, whether it 
is professional or personal, it is a factor in the prosperity, 
power, and greatness of the nation. 

COLLATERAL READING 

Carver, Thomas Nixon. Principles of Rural Economics. Boston, 191 1. 
Haney, Lewis H. Business Organization and Combination. New York, 
1914. 

Johnson, Emery R. American Railway Transportation. New York, 1910. 
Smith, Adam. The Wealth of Nations, Book IIL Oxford, 1880, 



PART IV. EXCHANGE 



CHAPTER XXIV 
WHAT IS VALUE? 

Exchange a part of the division of labor. In the chapter on 
The Division of Labor it was pointed out that there is a great 
advantage to be gained from specialization. When the whole 
industrial society is so organized that each person can do that 
for which he is best fitted by nature, training, inclination, and 
location, the general quality of the work is better than it would 
be if everyone had to learn a great many things. It was also 
pointed out that the division of labor necessitates the exchange 
of products and services.' In the economics of the private family 
the subject of exchange is so unimportant as to be ignored al- 
together. W^ithin the family a sort of primitive communism 
exists, so that even though there may be a division of labor 
among the members, there is practically no trading or bartering 
among them. In the larger industrial society, however, unless 
it is organized also on a communistic basis, there is a great deal 
of trading, barterijig, and exchanging. Therefore exchange has 
come to be one of the most important departments of the sub- 
ject of public economics or political economy. Our whole sys- 
tem of trading, transporting, and merchandising is a necessary 
part of an industrial system which is characterized by the 
division and specialization of labor. 

Valuation a part of exchange. An important part of this in- 
tricate system of exchange is the process of evaluating goods 
and services. It would be difficult to do very much exchanging 
without beginning to think in terms of value. In fact, even in 
the simplest case of barter, as when boys swap marbles, each 
barterer in his mind compares the desirability of the objects 
that are to be exchanged. To compare the desirability of the 

335 



336 PRINCIPLES OF NATIONAL ECONOMY 

objects is to think in terms of value. In its original and individ- 
ual sense the value of a thing was the esteem in which it was 
held ; in a somewhat more highly developed, or social, sense 
the value of a thing was the esteem in which it was held by all 
those who were interested in it. When men in considerable 
numbers were evaluating and comparing the same group of 
commodities and exchanging them a market was said to exist. 
Where a market existed for an object its value was the esteem 
shown for it on the market. The sign, or symptom, of that 
esteem is the fact that men were making sacrifices in order to 
get the object; that is, they were either laboring to get it or 
they were giving up other desirable things in exchange for it. 

Value in exchange. This willingness to give something — 
either labor or another desirable object — in exchange for a 
thing has finally come to be regarded by most writers as the 
value of the thing, instead of being., as originally, regarded 
merely as the sign, or symptom, of the esteem in which it was 
held. A brief but satisfactory definition of market value, or of 
value as it is understood on the market and in commercial 
circles, is "power in exchange." Under this definition the value 
of an article is the power which it confers upon its owner to 
command other desirable things in peaceful and voluntary ex- 
change. There has come, therefore, a change in the popular 
meaning of the word "value." In modern usage the esteem in 
which the object is held or the desire which is felt for it is that 
which gives it value instead of being the value itself. 

When value is defined as "power in exchange," it must not be 
confused with a mere ratio of exchange. A thi-ng which confers 
upon its owner the power to command other things in peace- 
ful and voluntary exchange has power or influence over the 
minds of men ; it influences their choice and induces them to do 
things which they would not otherwise do. It may, in a physi- 
cal sense, cause goods to move from one possessor to another. 
Within certain limits it exercises control, or at least influence, 
over motives. Of course, when things exchange against one 
another it must always happen that they exchange in certain 



WHAT IS VALUE? 337 

ratios, but the ratio is merely incidental and is not the essential 
characteristic of value. The weights of any two objects must 
bear some ratio to each other, but it would be a mistake to say 
that weight was in itself a mere ratio. It is equally wrong to 
say that value is a mere ratio. 

To value is to esteem. The purchasing power, or value in 
exchange, of a specific object is not always proportional to the 
esteem which is felt for it or to the intensity of the desire for it. 
Among wanderers on a desert a small portion of water would 
be exceedingly precious, but if none of them had anything to 
give in exchange for it, it would not have much purchasing 
power or market value ; that is, its owner would not realize 
very much from its sale. It would, however, be held in the very 
highest esteem ; it would be intensely desired ; it would have 
great power over human motives ; men would go to any length 
to get it; and if they chanced to have many things to give in 
exchange for it, it would have great power in exchange. The 
situation of some thirsty men on a desert with nothing to give 
in exchange for water is, however, very unusual. In the or- 
dinary market place men have something to give for whatever 
they desire most. The thing which is intensely desired, es- 
teemed, or appreciated will, under such circumstances, always 
command many other desirable objects in peaceful and volun- 
tary exchange. The tendency of later writers is to do away 
with the distinction between value in use and value in exchange. 
Value in use is nothing except utility, whereas value in exchange 
is simply value. There is, however, a very close connection 
between utility and value. Utility is sometimes defined as the 
power to satisfy a want or gratify a desire (in which case it is 
synonymous with desirability), but value is the power to com- 
mand other desirable things in peaceful and voluntary ex- 
change. Value depends upon desirability, since nothing could 
have value unless it had the power to satisfy a desire of some 
kind. In other words, nobody would give anything in peace- 
ful and voluntary exchange for the article in question unless 
he desired it. On the other hand, however intensely he might 



338 PRINCIPLES OF NATIONAL ECONOMY 

desire it, if he had nothing to give in exchange for it, and every- 
one else were in the same condition, it would not have much 
power in exchange. The water in the foregoing illustration 
would have great utility and desirability but no great value, — 
certainly no great market value. 

Censorious criticisms upon market value. There is, however, 
still another sense in which both "value" and ''utility" are 
sometimes used. One who has strong ideas on the subject will 
sometimes assert that a given commodity is^'really worth" very 
little, even though everybody seems to desire it and to be pay- 
ing a high price for it, or that it is ''really worth" a great deal, 
even though no one else seems to esteem it or to be willing to 
pay much for it. In this case the speaker is passing judgment 
upon the desires of the people. His judgment may be sound 
and that of the multitude unsound, or vice versa. There are, 
however, always those who have ideas on the subject of "real" 
value or utility as opposed to the popular idea of value or 
utility. Their idea of "real" utility is the power to satisfy a 
commendable desire, whereas economic writers have generally, 
though not universally, defined utility as the power to satisfy 
any sort of desire. There could be no possible objection to 
defining desirability in that way. 

Distinction between value and price. Value should also be 
distinguished from price. The price of an article, as has been 
explained many times by economists, is merely its value ex- 
pressed in terms of some single commodity which the com- 
munity has generally agreed upon as the measure of value and 
the medium of exchange. This commodity is usually money. 
Whenever the word "price" is used nowadays, if it is used 
properly, it means value expressed in money, or the amount of 
money which will be given in exchange for a certain article. 
Wherever the word "value" is used, at least in connection with 
the general conditions of the market, it means its general power 
in exchange against other articles, of which money is only one. 
The cheapening of money tends to create a general rise in 
prices but not a general rise in values. 



WHAT IS VALUE? 339 

To summarize, the economic value of an object is variously 
defined as 

1. Its price ; that is, the amount of money for which it sells (wrong) 

2. Its utihty (inaccurate), which may mean either 

a. Its power to satisfy any desire, or 

b. Its power to satisfy a commendable desire 

3. Its power to increase well-being (inaccurate) of 

a. An individual, or 

b. The nation 

4. Its power over human motives (correct) : 

a. Causing men to exert themselves in order to get it, and 

b. Causing men to give other desirable things in exchange for it, 

because of 
(i) The intensity of their desire for it, and 
(2) The abundance of other desirable things in their pos- 
session 

Value is power in exchange. Since we are here concerned 
with the general problem of exchange and market value in the 
civilization of which we are a part and under the conditions in 
which we have to make our living, the last of these four defini- 
tions will be used in this chapter. In this sense value is 
"power," it causes bodies to move; that is, it causes "men to 
exert themselves and causes things to move from one owner to 
another. It is, however, power over human motives and not 
mechanical power.* We may therefore accept "power in ex- 
change" as a good working definition of market value, or value 
as it is used on the market and in our general system of ex- 
change. Under this definition several questions will at once 
arise. One of these is. Why do some things possess this power 
and others not ? Another is, Why do some things possess more 
of it than others ? Or, again, Why does the same thing possess 
more of it at one time or place than at another ? 

Value attaches to concrete things. Not much headway can 
be made in answering any of these questions until we clear the 
way by certain necessary explanations. Some of these explana- 
tions can be understood only after some very hard and clear 
thinking. In the first place, we must distinguish between 



340 PRINCIPLES OF NATIONAL ECONOMY 

things in general and concrete units. It is one thing to speak 
of the value of bread in general ; it is another thing to speak of 
the value of a loaf of bread. It is one thing to speak of the 
value, or the lack of value, of air in general, and another thing 
to speak of the value, or lack of value, of a given cubic yard 
of air. If one will look around and see what is going on, one 
will notice that men are not exchanging things in -general, 
but only concrete units or quantities of things ; not wheat in 
general, but a given number of bushels of wheat of a given 
grade; not money in general, but a given number of dollars, 
francs, or pounds ; and even if air or water were exchanged, it 
would not be air or water in general, but some cubic yards or 
gallons in definite numbers. 

This distinction between things in general and concrete units 
or quantities will eliminate forever the confusion that some- 
times results when that distinction is not made. For example, 
we are sometimes told that air is of immeasurable utility, and 
yet it has no power in exchange. If a man will think, however, 
not of air in general but of a definite cubic yard of air which 
may be boxed up (it might even be offered for sale), and then 
if he will ask himself how much he cares for that particular 
cubic yard of air or how much use it is to him, he will find that 
he does not care for it at all or that it is of no use to him what- 
ever. If it were of any use to him (that is, if he would be any 
better off with it than without it) he would be willing to give 
something in exchange for it ; it would then possess value, or 
power in exchange. 

Total utility and final, or marginal, utility. In other words, 
there are two distinct ideas of utility : one is total utility, and 
the other is sometimes called specific, sometimes final, and 
sometimes marginal utility. We gain an impression of the total 
utility of air when we think what would happen to us if all the 
air in existence were suddenly annihilated or if we, individually, 
were shut off from access to air. From this point of view the 
total utility of air is incalculable. But if we were to consider 



WHAT IS VALUE? 341 

what would happen if a definite cubic yard were annihilated or 
if we were shut off from access to it, we get a very different 
impression. As a matter of fact, it would make no difference 
to anybody, because there would be enough left to satisfy 
completely every desire for air. 

In this world of adjustment, improvement, and progress, or 
of maladjustment and retrogression, the problem of having 
more or of having less of various things is always the important 
problem. How desirable is it that there should be more air 
than there is, or how undesirable is it that there should be less 
air than there is? Apparently this is a matter of indifference 
when one is out of doors. In certain close rooms it becomes 
a matter of importance, and air has some value in these cases. 
It is for this reason that in a practical, workaday world, where 
we are trying to improve our condition or to prevent it from 
becoming worse, we place a value on only those things which 
we desire to see increased. No social utility would be promoted 
by increasing the supply of air in any outdoor situation or by 
offering a price for increasing it. There is, therefore, no social 
or individual reason why it should possess any value or any 
power in exchange. On the other hand, if you think of an 
article of which you can say that you would be better off if you 
had a little more of it, or worse off if you had a little less than 
you have, you have a perfectly good individual reason for in- 
creasing your possession. Or if the community can say that it 
would be better off if it had more of it, or worse off if it had 
less, then the community would have a perfectly good reason 
for desiring to increase the supply. This is the case with every- 
thing which has value. 

The functional theory of value. A moral philosopher might 
conclude otherwise ; that is, he might think that the desires of 
the people were vicious and that they would be worse off if they 
had more of a certain article, whereas they themselves think 
they would be better off if they had more of it. It is the desires 
of the multitude rather than the conclusions of the moral 



342 PRINCIPLES OF NATIONAL ECONOMY 

philosopher which determine market value. This may be called 
a functional theory of value. The function of value in a society 
is to induce producers to produce. It is a symptom that more 
of the article possessing value is wanted. It is, at the same 
time, a means of getting more ; that is, if people will offer 
desirable things in exchange for an object someone may be 
persuaded to produce it. 



CHAPTER XXV 
WHAT DETERMINES THE VALUE OF A THING 

Commodities and specific units thereof. We saw in the last 
chapter that a definite, concrete thing, such as a loaf of bread 
or an egg, has value only because someone desires it, and that 
a general commodity, such as bread or eggs, has value only 
because someone desires more of it than he possesses. We saw 
also that in either case the more intense the desire for the thing 
or the commodity, the more value it will have, provided those 
who desire it have something to give in exchange for it or are 
able to exert themselves in the way of getting it. 

The next question is, What determines how intensely a 
concrete thing is desired or how intensely the people desire 
more of a commodity than they possess? It is obvious that 
something depends upon how much of the commodity they 
already possess. If everyone not only has quite enough for 
the present but foresees no scarcity in the future, it is obvious 
that he will have no desire for more of the commodity, nor 
would he have any desire for any concrete unit of it that you 
might offer him. If everyone is in that situation, no one will 
give anything in exchange for it. If, however, everyone has 
almost enough or thinks that he will always have almost enough 
of the commodity in question, his desire for more will not be very 
intense, nor will he give very much in exchange for it. But if 
he lacks a great deal of having enough or thinks that he is likely 
to lack it, he will give a great deal to get a little more. In this 
case each unit of the commodity will have high value. In short, 
the abundance or scarcity of a commodity has a great deal to do 
in determining the intensity with which each unit of it is 
desired and with its power in exchange. 

343 



344 



PRINCIPLES OF NATIONAL ECONOMY 



Demand and supply. The foregoing remarks are only an- 
other way of saying that the value of a commodity is deter- 
mined by the demand for it and the supply of it. This is well 
known as the law of demand and supply. This law, however, 
is not a mere convention of the market ; it is based upon certain 
physical and physiological facts, which are as true under one 
system of society as under another. 

First, let us understand how it works on an ordinary market ; 
that is^ where a number of buyers desire to buy, and different 
sellers desire to sell, varying quantities of the same commodity. 
Not all the buyers are equally anxious to buy, nor do they all 
have equal quantities of other goods to give in exchange. 
Therefore they will not all be willing to pay the same price for 
equal quantities of the commodity in question. Let us assume, 
for the sake of an illustration, that there are eleven possible 
buyers ready to buy at as many different prices. One is willing 
to pay^ let us say, as high as a dollar for a pound of the commod- 
ity if he cannot get it more cheaply. Another is willing to pay 
ninety-five cents, another ninety, another eighty-five, and so on, 
the eleventh not being willing to pay more than fifty cents. 
The prices at which these buyers are willing to buy are listed in 
the following table, under what is called the "demand schedule." 



Demand Schedule 



1st buyer 

2d buyer 

3d buyer 

4th buyer 

5th buyer 

6th buyer 

7th buyer 

8th buyer 

9th buyer 

loth buyer 

1 1 th buyer 



would 
would 
would 
would 
would 
would 
would 
would 
would 
would 
would 



pay $1.00 
pay $0.95 
pay $0.90 
pay $0.85 
pay $0.80 
pay $0.75 
pay $0.70 
pay $0.65 
pay $0.60 
pay $0.55 
pay $0.50 



^0.50 

Jo. 60 
^0.65 
?o.7o 
?o.75 
?o.8o 
i^o.Ss 
^0.90 
^0.95 
Si. GO 



Supply Schedule 

s 1st seller's lowest price 
s 2d seller's lowest price 
s 3d seller's lowest price 
s 4th seller's lowest price 
s 5th seller's lowest price 
s 6th seller's lowest price 
s 7th seller's lowest price 
s 8th seller's lowest price 
s 9th seller's lowest price 
s loth seller's lowest price 
s I ith seller's lowest price 



In order to simplify our illustration let us assume an equal 
number of sellers on the market, no two of whom are equally 



WHAT DETERMINES VALUE 345 

anxious to sell. The different prices at which we may assume 
that they would be willing to sell are listed above under what is 
called the "supply schedule." 

Under certain special circumstances which would be hard to 
reproduce, eleven units of the commodity might conceivably be" 
transferred. If the first buyer, not knowing that he could do 
better, should meet with the eleventh seller they could do busi- 
ness ; and if the second buyer in the list, under the same condi- 
tions, should meet the tenth seller, the third buyer the ninth 
seller, and so on, every buyer might buy and every seller sell 
one unit of the commodity. In this case, however, each unit 
sold would sell at a different price. 

On an open market, however, where each one knew what the 
other was doing, this would be impossible. There is a general 
tendency for each unit of the same grade and quality to sell at 
the same price at the same time and place. If such a uni- 
form price were established on the market the case would be 
very different. 

If the reader will study the two schedules and try to find 
a uniform price that will permit the largest number of sales to 
be made, he will find that the maximum number is six. If the 
price is fixed at one dollar it is obvious that only one sale can 
be made, for, though eleven sellers would sell at that price, only 
one buyer would buy. If the price were fixed at ninety-five 
cents two sales could be made. There would be ten sellers, but 
only two buyers. At seventy-five cents, however, there would 
be six sellers and six buyers. At seventy cents there would be 
seven buyers, but only five sellers. In short, seventy-five cents 
would be the price at which the maximum business could be 
done. If the price fixer desired to facilitate business and make 
the most of the situation, that would be the best he could do. 

In assuming a uniform price for all units of the commodity 
that are sold we are not departing very far from actual practices. 

The first law of the market. The first law of the market is 
that things of the same kind and quality tend to have the same 
value at the same time and place. That is to say, at any given 



346 PRINCIPLES OF NATIONAL ECONOMY 

time and place, if there are a large number of units, all exactly 
alike and equally desirable, they will all tend to sell at the 
same price and have the same power in exchange. If they are 
unlike, some of them being more desirable than others, of course 
some will have more power in exchange than the others. Again, 
the values may, on a feverish market, change from minute to 
minute ; that is, so rapidly as to create the illusion of selling at 
different prices at the same time. Or, again, in different por- 
tions of the same market similar things sometimes sell at 
different prices. The tendency, however, is toward a uniform 
price at the same time and place. Where a commodity has be- 
come standardized so that there are many units that are equally 
desirable, it has become customary to buy the article by quan- 
tity without taking the trouble to pick out the specific units 
desired. Wheat, coal, cotton, pig iron, and many other com- 
modities are so graded and standardized as to sell in this way. 
On the other hand, there are a great many commodities that are 
not easily standardized. In these cases the purchaser will 
usually insist on picking out the individual units which he 
desires. Race horses, dwelling-houses, farms, building-lots, and 
a multitude of other things will probably always have to be 
bought and sold in this way. 

Two reasons why a thing may not be wanted. If we agree 
that a thing will not have any value unless someone happens to 
desire it the next question is. Why are some things desired and 
others not? And why are some desired more than others? 
There are two primary reasons why an article may not be 
desired at all. In the first place, it may possess no total util- 
ity ; that is, there may be no use to which it can be put, so far 
as anyone knows. There are not, however, very many such 
things. The other reason is that there are so many other things 
just like the one in question as to more than satisfy the desire. 
Where water is very scarce the desire for it becomes intense ; 
where it is abundant the desire is completely satiated, so that if 
a specific barrel or gallon of water were offered for sale, no one 
would desire it at all. In such a situation water would have as 



WHAT DETERMINES VALUE 347 

little value as though there were no possible use to which it 
could be put. 

One might go even farther and name articles which, though 
capable of satisfying desires or of being put to important uses, 
have yet become worse than worthless; that is, have become 
nuisances through their overabundance. Many of the weeds 
which infest our fields belong in this class. Water in a swampy 
region also comes to possess a negative value (that is, men will 
go to considerable expense to get rid of a part of it), and yet it 
may be perfectly good water, capable of contributing not only 
to human life but to plant and animal life as well. Rabbits 
in Australia and English sparrows in America will serve as 
further illustrations. 

A commodity has«value only when there is not enough of it. 
We therefore reach the general conclusion that an article (that 
is, a definite object, such as may be bought and sold) has value 
©nly when it is wanted, and that it is wanted only when there 
are not enough objects like it to satisfy the desire for it. If 
there are so many others like it that the desire is completely 
satiated the object in question will not be wanted at all, and 
that holds true of each and every one considered singly. But 
if there are not enough to go round and satisfy everybody, each 
and every such object will be desired and will consequently 
have a value. 

Following the same line of reasoning^ we may reach the 
further conclusion that an object has much value when it is 
much desired ; it has little value when it is not much desired. 
Its power in exchange as compared with other things will depend 
on how intensely it is desired in comparison with other things. 

Physiological basis of the law of demand and supply. The 
great law of supply and demand is thus seen to have a physio- 
logical and psychological basis. The expression ^^ supply and 
demand" is merely a formula ; back of this formula there is the 
physiological fact pointed out in Chapter II. Every desire is 
satiable, and the more nearly the desire approaches the state of 
complete satiation, the less intense it becomes. Thus the reason 



348 PRINCIPLES OF NATIONAL ECONOMY 

that any superabundant article under ordinary circumstances 
has no value is because it is so abundant that every desire is 
completely satiated. That is the reason why water has little 
or no value in a well-watered country. Wherever it is so scarce 
that the desire for it is not completely satiated, as is the case 
in an arid climate where people are trying to farm, it has a 
value. It is the physiological or psychological state of the desire 
which furnishes the real basis for the law of supply and de- 
mand. With a given demand, the greater the supply the more 
nearly all desires will approach the point of satiation, and the 
more indifferent everyone's attitude toward the object becomes ; 
on the other hand, the smaller the supply, the more intense the 
desire for each unit of that supply, and the more anxious men 
are to get it. 

As there are two reasons mentioned above why an object 
may not be desired at all, there are also two similar reasons 
why the desire for it may be one of little intensity. In the first 
place, the possible uses to which the object may be put may be 
of very little consequence to anybody ; it may gratify a mere 
whim or caprice. In the second place, the supply may be so 
great that the desire is almost completely satisfied, and in this 
case no one will care very much about getting more than he has, 
nor will anyone give very much to get more. Under either set 
of circumstances no one gains very much in the way of satisfac- 
tion or well-being if some producer adds to the supply ; no one 
loses very much if some destroyer subtracts from the supply. 
This may seem very simple, but it is one of the most important 
considerations in the whole field of economics ; for the same law 
of value, as we shall see when we take up the study of distribu- 
tion, applies to thq labor of men as well as to material commod- 
ities. There are the same fundamental principles underlying 
the law of supply and demand in one case as in the other. 

The relation of utility to value. When we say that an object 
has value only when it is wanted we are virtually saying that it 
has value only when it has utility, for utility is by definition the 
power to satisfy a want or a desire. Whether that want be 



WHAT DETERMINES VALUE 349 

physiological (like hunger) or whimsical (like the desire for 
the latest novelty) does not affect the case in the ordinary 
economic sense. Economists have generally refrained from 
passing moral judgment on the quality of desires, though there 
is a tendency to depart from this tradition. If the gratification 
of a vicious desire does harm in the long run, it tends to destroy 
the well-being and prosperity of the community. This is a 
consideration of great economic importance. The tendency, 
however, in a democratic society, has been to assume that what- 
ever the people happen to like, it is their affair and not the 
affair of the economist or the moral philosopher. If there is a 
popular demand for a cheap and tawdry article or for dema- 
gogical politics, there would seem to be equally good reasons in 
either case for saying that the people should have what they 
like. To set oneself up as a moral censor, to pass judgment on 
the desires of the people either in commercial or in political 
affairs, has generally been considered undemocratic. Under the 
impulse of this rather extreme ideal of democracy, utility has 
been defined, as stated above^ as the power to satisfy desires, 
whether they be good, bad, or indifferent. Any object, there- 
fore, which possesses utility, or the power to satisfy a desire, 
possesses one of the essential factors in value. 

Meaning of scarcity. When we say that an article has value 
only when the desire for it is left unsatisfied we are virtually 
saying that it has value only when it is scarce. Scarcity is by 
definition insufficiency to satisfy desires. A thing may be rare 
without being scarce ; that is to say, however little there may 
be of a certain article, if that little is more than sufficient to 
satisfy all desires_, the article can hardly be said to be scarce. 
Flies in the winter time may be rare, but they are not scarce 
in the technical economic sense, since even then there are more 
than are wanted. Speaking absolutely, there may be more 
grass than weeds on a given farm, but, relatively to the farmer's 
desires, grass may be scarce while weeds are superabundant. 
If we assume that the article in question is appropriable, or 
capable of being possessed and enjoyed, and not, like the moon, 



350 PRINCIPLES OF NATIONAL ECONOMY 

entirely beyond our reach, we may say that anything which 
possesses both utility and scarcity will have power in exchange, 
and nothing else whatsoever will have that power. 

The utility of an article is the basis of the demand for it ; 
the scarcity of the article is the measurable limit of its supply. 
Every boy knows that the first apple which he eats at any one 
time tastes better than the second, provided they are alike, and 
the second better than the third, and so on. He knows also that, 
however capacious his appetite, if the supply of apples holds 
out he will ultimately reach a point where he doesn't care for 
any more ; in other words, he will reach the point of complete 
satiation so far as apples are concerned. When this point is 
reached, apples have lost their utility for him and he becomes 
indifferent to them. He may still be willing to give something 
in exchange for them in anticipation of tomorrow's hunger, 
but if he has a supply sufficient to satisfy not only present 
but future desires, he becomes absolutely indifferent and gives 
nothing in exchange for them. 

Social value. We now approach a secondary phase of the law 
of value. Even though a boy's own desire for apples may be 
completely satiated, not only in the present but in the antici- 
pated future, his commercial instinct may prompt him to prize 
them, not because he himself desires to consume them but be- 
cause he can trade them to someone else for objects which he 
himself desires. At this stage he has arrived at the point where 
he begins to take account of social utility as well as of individual 
utility. If he perceives that there is in society around him an 
unsatisfied desire for apples, he may make use of that unsatis- 
fied desire to acquire desirable things in exchange for his own 
surplus apples. This power (that is, power in exchange) which 
commodities possess on the market he is able to make use of 
to his own advantage. Thus we see a great many men produc- 
ing articles far in excess of their own needs because they know 
that these articles are exchangeable for other things which they 
need. We see a considerable body of men doing nothing except 
to trade in objects of general social desire. But the laws which 



WHAT DETERMINES VALUE 



351 




govern social valuation are fundamentally the same as those 
which govern individual valuation. There must be somebody 
in the community who has less of the object than he wants ; 
otherwise neither the producer nor the trader would be able to 
exchange the object for other desirable things. 

Diminishing utility. Desire and utility are reverse aspects of 
the same thing. The desire exists in the human being and is 
that which the object of the desire is capable of satisfying. 
Utility exists in the object outside the human being and is that 
which is capable of satisfying his desire. In proportion as the 
human being's de- 
sire is capable of be- ^ 
ing satisfied, in that 
proportion does the 
utility of the ob- 
ject which satisfies 
that desire diminish 
as its quantity in- 
creases. This diminishing utility of a desirable object is 
sometimes illustrated by means of a diagram, of which the 
above will serve as a sample. 

Let us measure the quantity of a certain commodity along the 
line OX, and the intensity of the desire for it along the line OY. 
When the quantity is represented, for example, by the line OG, 
each unit is desired with an intensity represented by the line 
OE ; and when the quantity is represented by the line OH, the 
desire is so well satisfied that the intensity of the desire is now 
represented by the line OF. If the quantity were to increase 
until it was represented by the line OD, all desires would be 
satiated ; that is, the desire for any particular unit of the supply 
would have no intensity^ — there would be no desire left. And, 
finally, if the quantity were to increase still further, the com- 
modity might be considered as a nuisance, and men might 
begin to desire to have less of it rather than more. The curve 
ABCD becomes the utility curve according to the assumptions. 
Just what shape this curve would take in any individual case 



352 



PRINCIPLES OF NATIONAL ECONOMY 



would be hard to determine. One thing, however, is certain 
(and this is the really essential thing), that, whatever its 
shape, it is a descending curve. Its distance from the line OX 
diminishes as we approach the point D. That is as certain as 
that a desire is satiable. Therefore we are safe in using a 
descending curve to illustrate the decline in the intensity of 
the desire for a commodity as the quantity of the commodity 
increases in proportion to the number of people who desire it. 
The total utility of the commodity is represented by the 
surface bounded by the lines OX, OY, and the curve ABCD: 
Its marginal utility (that is, the effective utility of any single 
unit of the supply) is represented by the line OE or BG 
when the quantity is OG, and by the line OF or CH when 
the supply is OH. 



Y A 



Y 



D 



-X 



\ 



O D 



If now we consider two commodities whose quantities and 
utilities are represented by the two diagrams above, we shall 
see how the relative intensity of the desires for the two com- 
modities will affect their relative values. 

Let us assume that the curves ABC in the two diagrams rep- 
resent the diminishing intensity of the desire for potatoes and 
oranges respectively, and the line OD in each diagram the 
available quantity of each commodity. The quantity of pota- 
toes being so much larger than that of oranges, the desire for 
them is much more nearly satiated than is the desire for 
oranges, though the total utility of potatoes is much greater ; 
that is to say, a pound of potatoes out of the total supply is 
very slightly esteemed or desired, whereas an equal quantity of 
oranges out of the much smaller supply is more highly esteemed 



WHAT DETERMINES VALUE 353 

or desired. Under these circumstances a pound of oranges 
would have as much power in exchange as several pounds of 
potatoes ; that is, oranges are more valuable than potatoes. 

By increasing the number of diagrams the relative power in 
exchange of a number of commodities could be illustrated in 
the same way. That, however, would introduce no new prin- 
ciple, but would only complicate matters. 



CHAPTER XXVI 
SCARCITY 

Causes of scarcity. It was shown in the last chapter that 
commodities must be both desirable and scarce in order to 
possess value. We have now to inquire why such things are 
scarce. There are four reasons which come within the limits 
of our comprehension. These we may call (i) "the niggard- 
liness of nature," (2) the expansion of desires, (3) the cost 
of production, and (4) monopoly. 

"Niggardliness of nature." When the term "niggardliness 
of nature" is used, it is not intended to cast reflections upon 
nature nor to imply that she is not bounteous in many respects. 
It is merely to call attention to a fact which cannot well be dis- 
puted ; namely, that in many places men have congregated in 
numbers greater than nature has there provided for. Desirable 
things are scarce in those places at least, and it is at least neces- 
sary to bring supplies from other places where there is a sur- 
plus. Moreover, there are many things which we desire which 
nature does not supply at all in the form in which we desire 
them, though she supplies the raw materials out of which we 
may make them. Again, some things which we desire can be 
produced only at certain times and seasons. They must there- 
fore be preserved and kept for other times when they will 
be needed. 

Expansion of desires. The fact that nature does not supply 
us with everything we desire in the exact forms and at the exact 
times and places when and where we happen to desire them 
may be in part due to the fact that we desire more refined prod- 
ucts than grow in a natural state, or to the fact that great 
numbers of us choose to live in places where such products do 
not grow in sufficient abundance. It is only a symptom of the 

354 



SCARCITY 



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356 PRINCIPLES OF NATIONAL ECONOMY 

maladjustment between man and nature. It is not necessarily 
the fault of either man or nature ; it is simply a fact of experi- 
ence, and we must make the best of it. There is, however, a 
marked tendency for human desires to expand. ''When goods 
increase, they are increased that eat them." In the language of 
the day, ''The richer we get, the more we want." Therefore 
we must expect an indefinite continuation of the condition 
wherein some desirable things are insufficient in quantity to 
satisfy everybody. We shall therefore continue trying to in- 
crease the supply of desirable things in the forms in which they 
are wanted and at the times when and the places where they are 
wanted. This is called the production of utilities, or, more 
properly, the adding of utilities to material things, — form 
utility, time utility^ and place utility. 

Cost. If the efforts which we have to make in order to pro- 
duce utilities were altogether pleasant and not in the least de- 
gree unpleasant or disagreeable, there is no reason why most 
things might not be produced in such abundance as to satisfy 
everybody completely. Some things, of course, cannot be in- 
creased by any human effort. Meteoric iron has long served as 
an illustration. Autographs of distinguished men of the past, 
the paintings of old masters, first editions of books, and a num- 
ber of other illustrations might be given. But if we are speak- 
ing of an ordinary reproducible commodity we are safe in 
saying that unless there were some difficulty in the way of 
indefinite reproduction, — some unpleasantness, irksomeness, 
or fatigue connected with its production, — its supply would 
certainly increase until everyone had all he wanted of it. 

Effort not always irksome. Illustrations are not hard to find 
of desirable commodities which have to be secured by human 
effort, but which, because the effort is pleasant rather than 
unpleasant, become so abundant as to command no price. Trout 
are generally regarded as a delicacy and are greatly desired. 
They can only be caught by considerable muscular effort and 
by the exercise of great patience and skill. And yet, in certain 
communities where the demand is not very great and the fishing 



SCARCITY 357 

not too arduous, trout are caught for sport in such numbers as 
to supply the neighborhood. They become free goods and are 
given to those who desire them without money and without 
price. If there were more consumers, or fewer persons who 
enjoyed the sport of fishing, there would not be enough to go 
around. Those who did not get as many as they desired would 
then be willing to pay a price in order to get more. In other 
neighborhoods flowers are grown for pleasure. The demand not 
being very great, and there being a number of people who enjoy 
gardening, there is such an abundance that everyone is sup- 
plied free of charge. Poultry-raising is a pleasure to many 
people if they do not have to work too hard at it. In most 
neighborhoods, however, there is a demand for eggs and poultry 
that cannot be completely satisfied with the products of those 
who keep poultry for the pleasure of it. In order to induce 
these to produce more than is pleasurable and to induce 
others to do the work who do not enjoy it at all a price must 
be paid. The price is paid, virtually, to overcome the disin- 
clination of producers. 

Cost is disinclination. All the reproducible products which 
sell on the market and which are not monopolized are limited in 
supply by some form of disinclination or reluctance to carry on 
the work of production. This disinclination may resemble that 
which one finds in the average fisherman, gardener, or poultry- 
keeper, to whom the work in small doses is not irksome, or it 
may be of a different sort altogether. In the case of the fisher- 
man, the gardener, and the poultry-keeper, their work may be 
pleasant rather than unpleasant up to a certain point. Almost 
anyone likes a certain amount of this kind of work, though 
some of us are easily satisfied. Beyond that point such work 
becomes irksome and fatiguing, and we keep at it only on condi- 
tion that someone pays us for it. Up to that point it was play ; 
beyond that point it literally becomes work. 

Opportunity cost. Where two kinds of work are pleasurable 
and one has to choose between them, the fact that one has to 
surrender the one form of pleasure in order to pursue the other 



3S8 PRINCIPLES OF NATIONAL ECONOMY 

introduces an element of cost or sacrifice. It is reported of a 
certain man that he was passionately fond of gardening, but 
could never stick to it because as soon as he began to dig he 
found worms, and they reminded him of fishing, of which he 
was even fonder than of gardening, which then became irksome. 

In other cases the work is disagreeable from the very start. 
There is no element of play in it. No one will do any of it 
unless he is paid for it. In still other cases the work itself 
would be pleasurable rather than disagreeable up to a certain 
point, if it were not for the fact that there is something else 
that one would rather be doing. A boy might not ordinarily 
mind working in the garden, but when there is a circus in town 
or a ball game going on, gardening suffers in his estimation by 
comparison with these other opportunities. Whenever we have 
to work long hours, there are pretty certain to be many other 
and more pleasurable things which we would rather do. Having 
to give up these other opportunities would make our work 
irksome even if it were not so of itself. 

The resistance which has to be overcome in order to get men 
to work. Cost, or cost of production, is the general name which 
we apply to the resistance which has to be overcome in order 
to get a thing produced. The real resistance is the resistance 
of the human will, as shown by the fact that even though physi- 
cal effort has to be put forth, so long as the effort is pleasurable 
it does not have to be paid for. As soon as it becomes irksome 
it has to be paid for. It is a matter of choice, and the price 
paid is a means of influencing choice. The irksomeness of the 
effort causes men to choose against putting forth the effort ; 
the price paid for the article causes them to choose in favor of 
it. Such words as ''irksome," ''unpleasant," or " diasagreeable " 
describe certain efforts as they appeal to the mind. The words 
"disinclination" and "reluctance" describe the attitude of the 
mind toward the effort which men would not be willing to make 
unless they were rewarded for it. 

Distinction between play and work. The difference between 
play and work is found just here. Play is effort of both mind 



SCARCITY 359 

and body which is put forth for the sheer pleasure of the effort 
itself. Work is effort which is put forth for the sake of a reward 
which is detachable from the effort or the action. Under very 
favorable circumstances all necessary effort might conceivably 
take the form of play, and in that case there would be no such 
thing as cost of production. A community made up of people 
with very simple habits and very strenuous natures, and in a 
very favorable environment, might possibly reach such a delec- 
table state. Having very simple habits, the inhabitants of this 
community would be able to get the greater part of their higher 
satisfactions out of those things whereof nature is bounteous, 
such as the sky, the clouds, the verdure, and pleasant company. 
Living in a very favorable environment they could produce such 
things as had to be produced with little effort. Having very 
strenuous natures, abounding in energy and delighting in effort, 
they could do the necessary work of production without any 
disinclination or reluctance. This, however, would be a kind 
of earthly paradise which we may dream about but are not 
likely to realize. 

Kinds of cost. When we say that the price of an article has 
to be high enough to cover the cost of production, we really 
mean that it has to be high enough to overcome the disinclina- 
tion of men to do whatever is necessary in order to produce it. 
This disinclination or cost is of various kinds and degrees. 
Mention has been made of those operations which are inher- 
ently disagreeable from the very start. This may be called 
disutility or pain cost. In other cases there is no disinclination 
until the work has been carried so far as to produce a sense of 
fatigue. This may be called fatigue cost. Again, the disin- 
clination may be due to the fact that the work in question 
prevents us from doing something else which we would rather 
be doing. This is called opportunity cost. Opportunity cost 
arises whenever, in order to do a certain thing, one must give 
up the doing of something else which would be advantageous or 
pleasurable to oneself. The advantage which one gives up may 
be of two kinds : it may be pleasurable in itself (that is, it may 



36o PRINCIPLES OF NATIONAL ECONOMY 

be play or amusement) or it may consist in the opportunity to 
earn money at some other job. In either case one must be paid 
for doing the thing in question, even though it is neither pain- 
ful nor fatiguing; otherwise one will avail oneself of another 
advantageous opportunity. 

Pain cost. Of these three forms of cost, pain cost is, in our 
day, the least important. In a rude society, when conditions 
were hard and enemies numerous, it may have been different. 
Nowadays, outside of a few dirty, dangerous, or otherwise 
disagreeable occupations, there is comparatively little work 
which is disagreeable in itself. When hours are long work is 
often fatiguing and irksome for that reason. But as pros- 
perity and well-being increase and general social conditions 
improve, opportunity cost comes to play a more and more 
important part. The possession of high wages or a large in- 
come creates opportunities for amusement or pleasure which 
otherwise would not exist. One then finds long hours more 
irksome than thej'" would otherwise be, not because they are 
more fatiguing but because they deprive one of those opportuni- 
ties for pleasure which one's larger income enables one to enjoy, 
A well-educated man has more opportunity for the pleasurable 
exercise of his faculties than an uneducated man ; therefore he 
needs more time in which to do these pleasurable things. If his 
services are desired he must generally be paid more in order 
to induce him to give up these other opportunities. Far more 
important than that, however, is the fact that a well-trained 
man has many more opportunities to earn money than an un- 
trained man. Among these opportunities he will choose only 
the one which he likes best. Whoever desires his services or 
his products must therefore bid against all other opportuni- 
ties which lie before the trained man. Work is not more pain- 
ful or more fatiguing to the trained man than to the untrained 
man, but his labor costs more because of the opportunities which 
he gives up when he decides to do a certain kind of work. 

Increasing cost. As population increases or concentrates in 
certain areas, the natural resources of those areas must either 



SCARCITY 361 

be worked more intensively or else the means of subsistence as 
well as the raw materials of industry must be brought from 
greater distances. To bring them from greater distances ob- 
viously requires greater effort unless new and improved methods 
of transportation are invented. Even with the best methods 
attainable it costs more to haul longer than to haul shorter 
distances. To work mines harder tends to exhaust them more 
rapidly. It is also possible to work land so intensively as to 
exhaust the soil unless great care is taken to put back in the 
soil as much plant food as is used up by the crops which are 
taken off. To exhaust either the mines or the soil will obviously 
make greater and greater efforts necessary if a large population 
is to be provided for on the same scale as before the exhaustion 
took place. Poorer mines must be worked and crops must be 
grown on poorer soil, where more effort is required to get the 
same crop. l^ 

Diminishing returns and increasing cost. Entirely apart from 
the exhaustion of the soil, however, is the great law of diminish- 
ing returns from land. This law, which is one phase of the 
universal law of variable proportions, will be discussed in detail 
in a chapter devoted to that subject (see Chapter XXXIII). 
For our present purpose it is only necessary to state and define 
the law. 

It is a well-knoWn fact that land yields more per acre under 
intensive than under extensive cultivation. By intensive culti- 
vation is meant the application of considerable quantities of 
labor and capital to each unit of land ; by extensive cultivation 
is meant the application of smaller quantities of labor and capi- 
tal. While land can be made to yield more when large than 
when small quantities of labor and capital are used in its culti- 
vation, still there are limits to this rule. In the cultivation of 
any particular crop there comes a point beyond which it does 
not seem possible, by any amount of labor, care, or cultivation, 
to increase the yield appreciably. Long before this point is 
reached, however, there is a tendency for the land to yield less 
in proportion to the labor and capital employed, even though it 



%' 



362 PRINCIPLES OF NATIONAL ECONOMY 

continues to yield slightly more per acre with each increased 
application of labor and capital to its cultivation. 

As a result of this law more effort is required to get from the 
soil of a given area subsistence for a large than for a small 
population. Rather than incur the increasing cost of produc- 
tion which would be necessary if an increasing population should 
attempt to get its subsistence from the same soil, men have 
uniformly chosen to spread their cultivation over wider areas 
(thereby incurring increased cost in transportation) or they 
have resorted to inferior soils within the boundaries of the 
original area, or they have done both. There is no good rea- 
son in the world why they should ever have done either of 
these things except that which is furnished by the law of 
diminishing returns. If they could have doubled, trebled, and 
quadrupled the production on the original area of good soil 
by merely doubling, trebling, and quadrupling the labor and 
capital used in its cultivation, there would never have been 
any reason for extending their cultivation. But when they 
found that by doubling the labor and capital they did not 
double the yield, even though the yield did increase some- 
what, then they had an excellent reason for extending the area 
of cultivation. 

We have, therefore, several reasons why increasing effort is 
necessary to get increasing supplies for an increasing popula- 
tion. The law of diminishing returns is one; the tendency 
toward the exhaustion of the soil, mines, and other natural 
resources is another ; the necessity of cultivating inferior soils 
is another ; and that of transporting materials greater distances 
is still another. All of these, however, are closely joined to- 
gether and mutually determine one another. Add to these 
the fact that increasing effort becomes increasingly irksome 
because of increasing fatigue and increasing opportunity cost, 
and we have what may be known as the law of increasing cost. 
This law of increasing cost, in turn, is the chief factor in limit- 
ing production and keeping the supply of various commodities 
so scarce as to give them a value. 



SCARCITY 363 

Monopoly. Among the factors which tend to make commodi- 
ties scarce nowadays^ one of the most important is monopoly. 
A monopoly is an agency which has sufficient control over the 
supply of a given commodity to fix its price. Without this con- 
trol over supply, any attempt to fix prices above that level which 
would pay the cost of production would merely tempt other 
producers to enter the field and take the market away from the 
would-be monopoly. A high price would stimulate the outside 
and independent producers to increase their output. Until the 
would-be monopoly is in a position to prevent anything of this 
kind, it has not won the unenviable privilege of being called a 
genuine monopoly. Any agency which has succeeded in getting 
control of the supply of a commodity has become a monopoly, 
or at least a partial monopoly, whether it likes to be called by 
that name or not. Aside from the government, probably no 
such thing as an absolute monopoly exists. A partial monopoly 
exists whenever an organization exercises sufficient control 
over the supply of anything to enable it to fix its prices, even 
within a narrow zone, independently of competition. This 
means that the power of a partial monopoly over prices is not 
absolute. It may fix the price somewhat higher, but not much 
higher, than competition would fix it. Where a monopoly is 
not absolute^ if it attempts to fix prices outside these limits it 
will create competition and destroy its power to control. 

This control may be exercised in two ways : first the monop- 
oly may decide upon the quantity to be produced and then sell 
that quantity for whatever it will bring on the market, allowing 
the law of demand and supply to fix the price ; second, the mo- 
nopoly may decide upon the price at which it will sell the prod- 
uct and then produce only as much as can be sold at that price. 
This is the method usually followed. In either case the supply 
is limited by the will of the monopoly and not by the cost of 
production. In a genuinely competitive industry the supply is 
limited by the cost of production. Producers will stop produc- 
tion rather than sell for any considerable time below the cost 
of production. 



CHAPTER XXVII 
MONEY 

Money a labor-saving invention. One of the greatest of all 
labor-saving devices is money. If one will try to imagine the 
difficulties of carrying on exchange without the use of money 
(that is, by means of direct barter), one will easily understand 
how great a convenience money is. Of course^ without the use 
of some kind of money we never could have developed our 
present highly specialized industrial system, under which each 
individual does that for which he is best fitted and exchanges his 
products or services for the products and services of other 
people who are likewise doing that for which they are best 
fitted. But even if we could imagine such an industrial system 
based on barter, the difficulties would seem almost insuperable. 
The tailor who had made a coat and desired bread in exchange 
might find difficulty in finding a baker who happened to want 
a coat ; even if he found such a baker, it would be difficult for 
the tailor to carry home as much bread as the coat would be 
worth. By some kind of credit system, of course, the baker 
could credit him with a large number of loaves of bread, to be 
called for one at a time. The dairyman who had milk to sell 
would find it difficult to know how to collect payment for the 
very small quantities which he delivered to the butcher, the 
baker, the tailor, etc. These difficulties would be so great that 
in all probability there would be comparatively little exchange. 
The farmer would have to be his own butcher, tailor, and shoe- 
maker. Each household, in fact, would have to be almost 
self-sufficing. 

So important is the function of money in modern industrial 
society that some writers have seen fit to divide systems of econ- 
omy into two fundamental types, known as the barter economy 

364 



MONEY 365 

and the money economy. Certain savage tribes who live in a 
state of primitive communism get along without much exchang- 
ing. Their limited commerce with the other tribes is carried 
on by means of barter ; furs and other articles of their own pro- 
duction are exchanged for outside products which they desire. 
The introduction of money makes possible a great deal of ex- 
changing within the tribe and is supposed to have marked one 
of the epochs in the economic development of civilized peoples. 
Various substances which have served as money. Various 
commodities or articles have served the purpose of money. The 
early colonists in America found the Indians using a kind of 
currency known as wampum, or bead currency. The Hudson 
Bay Company and other companies that traded with the In- 
dians of the interior developed a skin, or fur, currency, in 
which the skins of various animals were recognized as standards 
of value and exchanged at the ratios agreed upon. In ancient 
times various European peoples used cattle as currency. In 
the Homeric poems values are frequently quoted in terms of 
cattle. A very amusing and at the same time instructive illus- 
tration is given in a paper entitled ^^ Rudimentary Society among 
Boys," by John Johnson, in the Johns Hopkins University 
Studies in History and Political Science, Second Series, No. 11. 
In this primitive boy society butter was used as money. 

Butter and pie in boys' society. Commonly the primary object 
of the hunters is to obtain a handsome collection of curiosities, and 
to enjoy the satisfaction of possession along with the esteem inspired 
by success ; but occasionally a boy hunts with a purely commercial 
end in view. I have been told of one who made a practice of ex- 
changing all the eggs he found for the allowance of butter given to 
his companions at meals. This latter is dealt out to the boys in 
approximately equal portions of an ounce weight, and is frequently 
used by them as a means of exchange and measure of value. A flying 
squirrel has been known to bring fifteen "butters," and a sling, five 
''butters." The unit is subdivided once, the fractional piece being 
known as the "half-butter" and having a purchasing power about 
equal to that of one cent. Some boys who entered upon the manufac- 



366 PRINCIPLES OF NATIONAL ECONOMY 

ture of taffy obtained the needed butter by buying it from the rest 
at the price of two cents for one " butter," payment being made, at 
the option of the seller, either in money or in taffy. 

Their transactions are often so complicated that the boys find it 
desirable to lessen the number of payments of this novel currency, 
and they employ for this purpose a system of verbally transferring 
their claims from one to another, somewhat as merchants use negoti- 
able notes. Perhaps A buys a knife from B for ten "butters." B 
has an outstanding debt of the same amount for marbles, and he 
transfers to his creditor C his claim against A, who pays to C or to 
anyone else whom C may designate. 

At first glance this use of butter as money seems laughably odd ; 
but in fact it could be easily paralleled by long lists of articles equally- 
far removed from the gold, silver, and paper of our own currency, 
which have yet served as money in different parts of the world. The 
wampum of the early Indians is familiar to all readers, and Jevons 
and Roscher enumerate, among many other substances that have been 
so used, corn, wolfskins, whales' teeth, and straw mats. The former 
of these distinguished authors remarks that ''it is entirely a ques- 
tion of degree what commodities will in any given state of society 
form the most convenient currency" and our boy -state being in a 
condition where butter served the purpose, its citizens adopted that 
commodity as their money. 

Professor H. B. Adams added a footnote to the above, which 

reads as follows : 

At Phillips Exeter Academy, New Hampshire, in my day, there 
was a pie currency in vogue among the boys who boarded in Abbot 
Hall. Pie was something of a luxury, for it was furnished by " Burn- 
ham," the steward, only twice a week. The idea of value in exchange 
was naturally connected with our Saturday and Sunday allowance of 
pie ; in fact, there was a constant trading of different sorts of pie, a 
boy offering his mince or custard pie of one week for the apple or 
pumpkin pie that was to come the next week. Pie debts were, more- 
over, incurred in a variety of ways, chiefly for services rendered, — for 
example, by one's chum in making the fire on a cold morning, when 
it was not his turn, or by one student in aiding another in his lessons, 
etc. Boys would wager their pie sustenance for a week, and some- 



MONEY 367 

times for a month, on a match game of ball. These young bar- 
barians, at their ball play, used to rival the ancient Germans, who, as 
Tacitus describes, sometimes staked not only their property but 
their very freedom in games of chance. What could be greater reck- 
lessness for a hungry boy than to risk his pie for a month on the 
issue of a game of baseball? In ordinary transactions the unit of 
pie value at Exeter was the "piece," which was served us on a 
special plate; but there were as many standards of value as there 
were sorts of pie, so that in the settlement of a small debt of one or 
two "pieces," boys sometimes sought to pay their creditors in pie of 
an inferior or less marketable quality. Poor pie was like trade dol- 
lars. Sometimes a creditor would find himself with an embarrassment 
of riches. If his debtors insisted on paying off their obligations on one 
day in one sort of pie, he would be obliged to eat up all his perishable 
substance at once, or to dispose of it at a considerable sacrifice. 

So great is the need for money in a society where there is any 
exchange of desirable articles that almost anything which is 
commonly used and appreciated may serve the purpose of 
money. Among primitive herdsmen, cattle meet the conditions. 
They are universally esteemed and appreciated, they are famil- 
iar objects whose value is generally understood, and they are 
easily transferable. They lack, however, certain other qualities 
which make modern metallic money convenient. 

Qualities which- the money material should possess. Jevons, 
in his '^ Money and the Mechanism of Exchange," names seven 
qualities which are desirable in the material of which money is 
made. They are, first, utility and value ; second, portability ; 
third, indestructibility ; fourth, homogeneity ; fifth, divisibility ; 
sixth, stability ; and, seventh, cognizability. Cattle possess only 
the first, second, and seventh of these qualities, and perhaps, to 
a slight degree, the sixth. That they are useful to primitive 
herdsmen is rather obvious. They furnish their own portability 
in that they can carry themselves about. They possess cogni- 
zability because all are familiar with them. There may be a 
fair degree of stability also in their value, though that is by no 
means certain. The skins of animals, used as money by hunting 



368 PRINCIPLES OF NATIONAL ECONOMY 

tribes, possess the same qualities as cattle, but still lack the 
others which Jevons deems desirable. The "butters," as used 
in the rudimentary society mentioned above, seem to possess 
everything except indestructibility. 

Precious metals especially adapted. It has been found that 
the precious metals, especially gold and silver^ possess all these 
qualities in superior degree. If by utility we mean desirability, 
or the capacity to satisfy a desire, there is no doubt that gold 
and silver possess this quality. If we were to take a narrow and 
somewhat puritanical view of utility we might question this. 
They possess portability because there is considerable value in 
small bulk. This would not be true of the coarser metals. They 
possess indestructibility to a high degree ; they do not corrode 
or rust as iron would. They possess homogeneity, — that is, 
gold of equal purity is essentially alike the world over; it 
may be easily standardized as to quality, so that one piece of 
metal may be equally desirable with every other piece of the 
same size and standard of fineness. They possess divisibility ; 
that is, a piece of gold or silver may be divided into smaller 
pieces, and each of the smaller pieces will have value in pro- 
portion to its size. This would not be true of diamonds and 
precious stones^ though these would possess portability and 
indestructibility in high degree. Gold and silver possess sta- 
bility of value in a very peculiar sense. Over long periods of 
time they will fluctuate considerably, but over short periods of 
time (that is, from week to week, from day to day, from hour 
to hour) they will fluctuate very little ; whereas other commodi- 
ties, such as farm products, pig iron, and other articles which are 
dealt in largely, fluctuate rapidly over short periods of time. 

Reasons for the stability of gold prices. One reason for the 
stability of the value of the precious metals over short periods 
is that the mass of gold or silver in existence at any one time is 
very large in proportion to the product of any given year. The 
total amount of wheat in existence at the present moment has 
practically all been produced within the last year, or two years 
at the outside. Of the total gold in existence a very small frac- 



MONEY 369 

tion was produced within the last year or two. Suppose you 
had a large reservoir of water, fed by a very small pipe. If the 
flow through the small pipe were to vary considerably from day 
to day, it would make very little difference in the total quantity 
of the reservoir ; though if the increase or decrease kept up for 
many years, there might be a considerable change in the quan- 
tity in the reservoir. This is analogous to the case of gold. The 
total quantity in existence is like the quantity of water in the 
reservoir ; the total annual production is like the quantity which 
flows into the reservoir through a very small pipe. The case of 
wheat is like that of a small reservoir fed by a very large pipe. 
Any change in the quantity flowing through the pipe is likely 
to make a considerable change in the quantity in the reservoir. 
That is to say, a large crop of wheat in one year will make a 
great difference in the total quantity available for the world's 
supply. A crop failure, on the other hand, will make a con- 
siderable shortage in the world's supply. The value of wheat, 
therefore, fluctuates rapidly over short periods of time. Since 
it would take a number of years of excess production of gold to 
make an appreciable difference in the total quantity available 
for the world's supply, gold does not fluctuate much from day to 
day, from week to week, or even from year to year. 

Since most of the transactions in which we use money are 
short-time rather than long-time transactions, it is more impor- 
tant that the money material be stable in value over short 
periods than that it be stable in value over long periods. Occa- 
sionally we invest our money in something which we expect to 
last a long time (in such cases we are interested in the stability 
of the value of money over long periods), but most of our pur- 
chases are made from day to day. The average business transac- 
tion has very little relation to long periods of time. This is one 
of the principal reasons why gold and silver serve the purpose 
of a money material better than most other products. In this 
respect gold has proved to be superior even to silver. 

Cognizability. As to cognizability, the superiority of gold 
and silver over other materials is not so great. The expert can 



370 



PRINCIPLES OF NATIONAL ECONOMY 



always apply tests by means of which he can detect spurious 
coins, but the inexpert usually has to depend upon his eyes and 
his ears and his sense of touch. But there are not many other 
substances which cannot be adulterated or of which counter- 
feits may not be made. Gold and silver are not particularly 
wanting in cognizability, though they are not preeminently 
superior in this respect. 

Convenience of handling. For certain minor coins, how- 
ever, neither gold nor silver is well adapted. There is so much 
value in such small bulk in gold, for example, that one would 
need a magnifying glass and tools more delicate than the human 
fingers to handle gold coins of the value of our five-cent pieces 
and one-cent pieces. Mere physical convenience requires a 
coarser metal for these small values. Even the gold dollar, 
which once was coined in the United States, proved too small 
and inconvenient, and its coinage was therefore suspended. The 
forms of money now in existence in the United States are indi- 
cated in the following outline : 



KINDS OF MONEY IN THE UNITED STATES 



Coin 



rcoid 



Silver 



Paper 



f Double eagle 
Eagle 
Half eagle 
^ Quarter eagle 
r Dollar 
Half dollar 
Quarter 
Dime 

Nickel (five-cent piece) 
^ Bronze (one-cent piece) 
' Gold certificates 
Silver certificates 
Treasury notes 

United States notes (greenbacks) 
National bank notes 
Federal Reserve notes 
Federal Reserve Bank notes 



MONEY 371 

The coins are sufficiently familiar to require no description. 
Their differences appeal readily to the eye. It is noticeable, 
however, that comparatively few people note carefully the dif- 
ferent kinds of paper currency. Anyone who has coins in his 
pocket can tell you instantly to which class each coin belongs. 
Comparatively few people, however, can tell you about the dif- 
ferent pieces of paper money in their pockets. 

The first three forms of paper currency mentioned in the 
above outline may be called warehouse receipts. For the con- 
venience of the people the Federal Treasury issues these re- 
ceipts in return for deposits of other forms of money. If, for 
example, one has a large quantity of gold or silver coin and 
desires something more convenient, he may deposit the coin with 
the Secretary of the Treasury and receive in return gold or 
silver certificates. These merely certify that the coin has been 
deposited in the Treasury. These certificates then circulate as 
money. Gold certificates are issued against deposits of gold, 
and silver certificates against deposits of silver. A silver cer- 
tificate, for example, reads : ^'This certifies that there have been 

deposited in the Treasury of the United States of America 

silver dollars, payable to the bearer on demand." The Treasury 
notes were issued in the purchase of silver bullion under an act 
authorizing such purchase. They have almost disappeared from 
circulation, having been redeemed by the coinage of the bullion 
for the purchase of which they were issued. The United States 
note, popularly known as the greenback, is issued by the Fed- 
eral government as pure credit currency. It has on its face, 
among other things, " The United States will pay to the bearer 

■ dollars." The issue of these notes was authorized by act 

of Congress during the Civil War as a means of financing 
the war ; that is, as a means of paying the obligations of the 
government. The amount then authorized, with only a slight 
reduction, has been kept in circulation ever since. The national 
bank notes are technically known as national currency. They 
are secured by United States bonds or other securities deposited 



372 PRINCIPLES OF NATIONAL ECONOMY 

with the Secretary of the Treasury. They are issued to the 
bank making the deposit and bear on their face the name of the 
bank. It is the bank, however, which agrees to pay, rather than 
the government; the government merely stands back of the 
bank. A bank note has on its face, among other things, "The 

National Bank of will pay to the bearer on 

demand dollars." 

The Federal Reserve notes are issued to the Federal Reserve 
Banks by an agent of the United States Treasury. They are 
sent to the member banks by the Federal Reserve Banks in 
return for deposits of commercial paper, and are then put into 
circulation by the local, or member, banks. The Federal Re- 
serve Bank notes are used as yet only to a small extent. They 
are issued to the Federal Reserve Banks by the United States 
Treasury in return for deposits of government bonds, being in 
all essentials like the national bank notes which they are 
intended to replace. 

Standard money. Among all these forms of money there is 
one which is known as standard money ; that is, gold coin. The 
value of the gold coin depends on the value of the material of 
which it is made. So long as the present policy of the govern- 
ment is maintained, the value of a gold coin -can never vary 
appreciably from that of the metal which it contains. One 
reason for this is that the government will undertake to coin all 
the gold that is brought to the mint and to charge nothing for 
the work of coining except the value of the alloy which is put 
in. Since this alloy also has some value, this virtually means 
that if you bring to the mint not only the gold but also the other 
materials which go into the coin, in the proper ratio, the govern- 
ment does the work of coining free of charge; you merely 
supply the raw material. Therefore, when there is even the 
slightest tendency for the value of coin to rise above that of 
bullion, men will anticipate this tendency by taking bullion to 
the mint. Since coin is easily melted down into bullion, if 
bullion showed the slightest tendency to exceed coin in value 
that would be anticipated by melting coin down into bullion. 



MONEY 373 

These two processes make it practically certain that so long as 
the government can maintain its policy gold coin and bullion 
will be identical in value. 

Token currency. Gold is the only form of money now in 
circulation in the United States which is actually standard 
money. The exchange value of a silver coin is greater than that 
of the metal of which it is made. The same is true of the nickel 
and bronze and conspicuously true of the paper. The general 
name applied to these other forms of money is ^^ token currency." 
They are accepted in exchange not because of the value of the 
material of which they are made but because they stand as 
tokens, or representatives, of some other form of value. With 
the currency certificates, gold certificates, and silver certificates 
this is perfectly plain, because the bank agrees to pay other 
forms of money. Even with the silver coins_, while there is no 
direct agreement to exchange gold for them, the practice pre- 
vails. In addition to this and quite as important also is the 
fact that the government itself receives all these forms of cur- 
rency in payment of obligations to itself. Thus you can pay 
your taxes, you can buy postage stamps, you can pay customs 
duties, and any other obligation which you owe to the govern- 
ment in these other forms of currency. Technically the United 
States notes, or greenbacks, are not legal tender for payment 
of customs dues, but as a matter of fact they are receivable. 
By legal-tender currency is meant any currency with which you 
can pay a debt and compel the creditor to take that or nothing. 
You can offer, or ''tender," him the amount of the debt, and he 
cannot demand some other form of currency. Most of our 
forms of currency are legal tender for any amount, except our 
smaller coins, which are legal tender for only limited amounts. 
They thus represent in that indirect sense a real value, or they 
serve these valuable purposes for their possessors. In the third 
place, some of them are declared to be legal tender; that is, 
you can pay your debt, not only to the government but to any- 
one else to whom you owe money, by offering various forms of 
token currency as well as by offering gold. 



374 PRINCIPLES OF NATIONAL ECONOMY 

The question has frequently been raised, Why use such 
expensive materials as gold and silver for money? Would 
not some cheap substance, such as paper or aluminum, serve 
equally well ? Many long and heated controversies have been 
waged over this question. The so-called "hard-money" school 
have taken the position that the government cannot make 
money, it can only stamp money. The stamp merely serves as 
a certificate of its weight and fineness ; the market itself must 
then determine its value. The '' soft-money " school, on the con- 
trary, have pointed to many historic instances in which cheap 
materials have actually served as money and circulated at a 
value which bore no relation to the value of the substance of 
which it was made. The truth seems to be summarized as 
follows : ( I ) Long-established customs, in a country such, for 
example, as China, where custom rules supreme, may enable a 
kind of money to circulate at a customary value regardless of 
the commercial value of the material of which it is made. 
(2) A government which is in the habit of using a great deal of 
compulsion over a people who are in the habit of submitting 
to authority and compulsion may by its own decree cause 
money to circulate at legally established rates without regard 
to the commercial value of the substance of which it is made. 
But a government which is not in the habit of exercising a great 
deal of compulsion, and a people who are not in the habit of 
submitting to it, have to rely mainly upon voluntary agreement 
among individuals inmost of the relations of life. (3) Where vol- 
untary agreement rather than government compulsion is mainly 
depended upon, it has hitherto proved impossible to get people 
voluntarily to agree upon any substance as the material for 
standard money except something which has had a value as raw 
material commensurate to its value as money. (4) Cheaper 
substances may, however, be used in limited quantities as token 
money even in liberal countries where everything is done by vol- 
untary agreement : (a) when standard money will be exchanged 
for it; (b) when the government will accept it in payment to 
itself ; (c) in small quantities when the government exercises 



MONEY 375 

its authority by compelling a creditor to accept it in payment of 
a debt when offered by a debtor. This, however, is an exercise 
of compulsion, but it is one to which many even of the liberal 
governments resort. 

The scale of prices and the value of money. It is commonly 
understood that a general rise in prices of all commodities is the 
same as a fall in the purchasing power of money, and a general 
fall in prices as a rise in the purchasing power of money. When 
a dollar buys a great deal, it has high purchasing power but com- 
modities are cheap. When it buys very little, its purchasing 
power is low but commodities are dear. It is very important, 
therefore, that we study this, — one of the most intricate and 
difficult of all economic questions. 

Upon the question What determines the purchasing power 
of money? there has been much disagreement. There are a 
few certainties, however, and they should be understood by 
anyone who hopes to avoid confusion in the more detailed 
discussions. 

Standard money. In the preceding discussion it was stated 
that gold is the standard money in the United States. It is the 
only kind of money in this country that derives its value from 
the material of which it is made, and the government makes no 
effort to give it a purchasing power higher than that of gold 
bullion of equal weight. In the case of every other form of cur- 
rency the purchasing power is greatly in excess of that of the ma- 
terial of which it is made. This excess value is due to a special 
effort of the government. This special effort is for the specific 
purpose of giving to every other kind of dollar a purchasing 
power equal to that of the gold dollar. The gold dollar, con- 
sisting of 25.8 grains of gold, nine tenths pure, is thus the 
standard dollar. Every other dollar is given a value equal to 
that of a gold dollar mainly by the method of interchangeability 
or of redemption. So long as the government is willing and 
able to give gold in exchange for other forms of currency, and 
to accept other forms in payment to the government on the 
same terms as gold, every citizen is practically as desirous of 



376 PRINCIPLES OF NATIONAL ECONOMY 

having these other forms as of having gold coin, and they will 
have the same purchasing power as gold coin. 

The gold standard. In this country we have what is called 
free and gratuitous coinage of gold. By the free coinage of 
gold is ordinarily meant that the government places no restric- 
tions upon the quantity of gold that may be coined. Anyone 
who cares to have gold bullion made into gold coin can have it 
done without limit as to quantity. By gratuitous coinage is 
meant that the government makes no charge for the work of 
coining the bullion. Accordingly, therefore, the holder of a 
quantity of gold bullion of the required fineness can take it to 
the mint and receive in return an equal weight of gold coin. 
If any charge is made, it is only for the necessary alloy to bring 
the bullion to the same standard as that required in the coin. 
It is pretty certain, so long as this practice continues, that 
gold coin can never be worth more than the bullion of which 
it is made. In short, wherever the free and gratuitous coin- 
age of gold coin is practiced by the government, gold coin 
and gold bullion of equal weight and fineness must always have 
equal values. 

Seignorage. If, however, any government for any reason 
suspends the free and gratuitous coinage of gold, the parity of 
value may easily disappear. If the government suspends the 
free coinage (that is, if it sets a limit to the quantity of coin 
it will manufacture or of bullion that it will make into coin) 
it might easily happen that coin would come to be worth more 
than bullion of equal weight. Again, if instead of coining the 
gold gratuitously the government were to charge for it or make 
a seignorage charge, as it is called, the value of the coin would 
tend to equal that of the bullion plus the cost of manufacturing ; 
that is, plus the seignorage. But since the more enlightened and 
progressive nations have practiced both the free and the gratui- 
tous coinage of gold, it has happened, as a matter of course, 
that gold coin has had, in all the great financial centers, the 
same value as the material of which it has been made. In such 
countries nothing can change the value of gold coin unless it 



MONEY 377 

can also, at the same time, change the value of uncoined gold 
or gold bullion. 

The silver standard. Many countries, particularly in Latin 
America, use silver as the basic metal and make silver coin the 
standard money. In those cases all that has been said concern- 
ing gold and gold coin in gold-standard countries can be re- 
peated with respect to silver and silver coin in silver-standard 
countries. 

Maintaining the parity of gold and paper currency. Even 
though other forms of currency are in circulation in any coun- 
try, and there are many kinds even in this country (see page 
370), every enlightened government tries, so far as possible, to 
maintain a parity between these other forms and its standard 
money. In this and other gold-standard countries this means 
that the effort is made to keep all other forms of currency on a 
parity with gold. In the United States, for example, it would be 
looked upon as little short of a disaster if a paper dollar of any 
kind or description or a silver dollar should not purchase as 
much as a gold dollar on the open market. Our government 
failed to maintain this parity for a number of years during and 
following the great Civil War of 1861-1865. Every European 
government that was engaged in the World War of 1914-1918 
also failed in this respect. In all these cases gold was scarce 
and hard to get and paper money became cheap. 

Redemption of paper currency. The method by which all 
these other forms of currency are held — if they are held — at a 
parity with gold is very much the same, fundamentally, as that 
by which the parity between gold coin and gold bullion is 
maintained. That is the method of interchangeability. So long 
as any holder of one can always and freely get the other in 
exchange for it, it is not likely that either one will ever have 
greater purchasing power than the other. The reason is that if 
anyone even suspected that the kind in his possession might 
have less purchasing power than the other, he would at once 
exchange it for the other. So long as the government stood 
ready and able to exchange either one for the other in unlimited 



378 PRINCIPLES OF NATIONAL ECONOMY 

quantities, it would be impossible for one to have greater or less 
purchasing power than the other. This is as true of gold and 
paper money, or gold and silver, as of gold coin and gold bullion. 

Suspension of specie payments. But when the government is 
no longer willing or able to exchange one for the other in the 
quantities presented, it is extremely unlikely that the parity of 
value will be preserved. When the reason for the government's 
inability to do this is the vast amount, let us say, of paper 
currency in circulation and the small amount of gold left in the 
country because of shipments of gold to foreign countries for 
the purchase of supplies, it is an absolute certainty that the 
parity cannot be maintained. When a government can no 
longer exchange standard money for paper currency, it is said 
to suspend specie payments. This is merely a confession of its 
inability to get enough standard money to exchange for all the 
paper that is being presented. There is nothing then to keep 
paper money from becoming cheaper than gold ; that is, to 
prevent a paper dollar from having less purchasing power than 
a gold dollar. 

Value of irredeemable paper. The question next arises, Why 
does paper currency have any purchasing power whatever when 
the government is no longer able to '^redeem" it or to give 
standard money in exchange for it? We need first to distinguish 
between different kinds of paper currency. As was shown in 
the preceding chapter, gold certificates and silver certificates 
and Treasury notes are merely warehouse receipts, certifying 
that gold or silver has been deposited with the Treasury and 
is payable to bearer on demand. If the government refused 
or were unable to pay gold or silver on demand for these 
certificates, they would then be like any other form of paper 
money for which the government would not exchange gold. 
How much value would they have ? The United States notes, 
or greenbacks, are not warehouse receipts, and there is no 
special quantity of metal kept on hand for their redemption. 
They are more nearly like a personal note of an individual, in 
that the government is bound to pay them, whenever they are 



MONEY 



379 



presented for payment, with any money it happens to have or 
can lay hands on. If the government refused to pay or redeem 
them, how much value would they have ? National bank notes, 
Federal Reserve notes, and Federal Reserve Bank notes rest 
first on the credit of the banks, though ultimately on that of 
the government. If neither the banks nor the government could 
redeem them, how much value would they have? 

Things that make a demand for paper money. There are sev- 
eral things that make paper currency desirable and therefore 
valuable, even though the holder cannot get standard money 
for it. In the first place, if the government will receive it 
for taxes or duties, or in the purchase of postage stamps, 
that alone would make it somewhat desirable and therefore 
it would have some value. Again, if it is made legal tender 
for debts, this will give it an additional value. If it is made 
legal tender for debts, it means that anyone who owes a debt 
can pay it in this kind of money and the creditor must accept 
it. The creditor may not like it, but from the standpoint of 
every debtor this kind of money becomes somewhat desirable 
and therefore has some value. With these two elements of 
desirability it is pretty certain that paper money would have 
some desirability and some value even though the govern- 
ment were never likely to redeem it in standard money. If 
it existed in small quantities, so that every dollar of it could 
probably be used in one of these two ways, or every possessor 
was pretty certain to find one of these two uses for it, there 
is every reason to believe that it might maintain its parity 
with standard money. While not redeemable in standard 
money, it is a partial substitute for it or, rather, it is a per- 
fect substitute for it in two of the uses to which standard 
money is put. 

Hope of future redemption. In most cases of suspended 
specie payments, there is the expectation of resumption at some 
time in the future ; that is, though the government may not 
now be giving standard money in exchange for paper, it is 
understood that it will begin doing so just as soon as it can. 



38o PRINCIPLES OF NATIONAL ECONOMY 

This also helps to make paper money desirable and therefore 
valuable. A great deal depends, of course, on the confidence 
which the people have in the ability of the government to 
resume specie payments and how soon they expect it to 
begin. During our Civil War it has been shown ^ that the 
disparity between gold and paper increased when there was 
bad news from the Union armies and decreased when there 
was good news. This showed very clearly that people thought 
more highly of paper money when it looked as though the war 
would soon be won by the Federal government than when it 
looked otherwise. While the quantity of paper money in 
circulation was considerable, and would probably have caused 
it to lose some of its purchasing power, nevertheless the expec- 
tation that it would sooner or later be redeemed in gold obvi- 
ously had a great deal to do with giving it such purchasing 
power as it had. 

Custom. In addition to all these factors which help to give 
irredeemable paper money some purchasing power in any 
country, there is the fact of custom, which, in some countries, 
plays an important part. The habit of handling a certain kind 
of money may, with the lapse of time, become so well estab- 
lished as to lead most of the people to care very little whether 
it is ever redeemed or not. If the government quietly stops 
redeeming in standard money, and if many of the people do 
not care anything about it, the money may go on circulating 
for a time as though nothing had happened. But where large 
sums of money are needed in international trade, in which local 
customs play no part, this is a factor that cannot be relied upon 
to keep irredeemable paper money in circulation. At best it 
has a limited application. 

Fiat money. In those countries where the government is in 
the habit of exercising a great deal of authority and the people 
of yielding a great deal of obedience, a mere government fiat 
may go a long way toward keeping irredeemable paper money 

iSee W. C. Mitchell, A History of the Greenbacks, pp. 203, 204. The Uni- 
versity of Chicago Press, 1903. 



MONEY 381 

in circulation. Let such a government decree that a certain 
kind of paper money shall be accepted in all sales and threaten 
with dire punishment anyone who refuses to accept it : a docile 
people may submit and such a currency may circulate (for a 
time), especially if there is not too much of it. 

Quantity a factor. In all these cases the question of the 
quantity of the irredeemable paper currency is an important 
but not the only factor. It is true that a smaller quantity 
would circulate and possess a higher purchasing power than a 
larger quantity. It is equally true that with the same quantity 
the expectation of future redemption, the willingness of the 
government to accept it in lieu of standard money in the pay- 
ment of taxes and public dues, the existence of a legal-tender 
law, the influence of custom, and the habits of the people 
in the matter of obedience to the government will all have 
something to do with the purchasing power of paper money. 

In the case of silver in this country there is, in addition to all 
that has been said about paper^ the fact that the silver of which 
it is made has some value in itself. This alone makes a silver 
coin somewhat desirable and gives it some value. The afore- 
mentioned factors add to that desirability and value. 

Effect of credit currency. Another and somewhat more dif- 
ficult question arises with respect to redeemable currency in a 
country that actually maintains the parity of its redeemable 
currency with its standard money. How does an increase in 
credit currency, for example, affect the purchasing power of 
m.oney, assuming that its parity with gold is constantly main- 
tained ? If the parity of gold coin and credit currency is main- 
tained and also that of gold coin and gold buUion, no kind of 
money can become cheaper unless gold also becomes cheaper, 
or dearer unless gold bullion also becomes dearer. How can 
credit currency make gold bullion cheaper? It may do this 
by displacing gold coin and causing it to be melted down 
into bullion. If there were no credit currency of any kind and 
all our business transactions had to be carried on by means of 
gold coin, it would take more gold coin than is required when 



382 PRINCIPLES OF NATIONAL ECONOMY 

most of the business is done with credit instruments/ So much 
bullion would have to be withdrawn from the arts and made 
into coin as to leave a scarcity in the arts. This scarcity in the 
arts would increase its value. In proportion, however, as credit 
currency displaces gold, gold is released from circulation and 
made available for use in the arts. This alone^ even if nothing 
else were involved, would tend to cheapen it in the arts. 

During and immediately following the World War, when so 
much of the business of the world was done with credit cur- 
rency, very little gold was actually used in circulation. This 
tended to make gold abnormally cheap. Even in this country, 
where the parity of paper currency and gold coin was carefully 
maintained, prices were abnorrnally inflated, in spite of the fact 
that they were essentially gold prices. When the paper cur- 
rencies of the world are diminished and gold is again needed in 
circulation, this increased demand for it will tend to raise its 
price and to decrease the prices of other things in terms of gold. 

To support this conclusion adequately it is necessary to 
analyze the question of the commodity value of gold. If we 
forget, for a moment^ that gold is ever used as money, and think 
of it as a metal having uses in the arts, we shall understand that 
its value is determined precisely as is that of any other commod- 
ity. In other words, the value of gold is determined directly by 
the utility of the marginal increment of the available supply. 
It is determined indirectly by the marginal cost of producing 
it, the cost being one of the factors which determine the supply. 
Where a commodity is used for two distinct purposes, whatever 
is used for one cannot be used for the other. That which is 
used for one purpose reduces the supply available for the other. 
The supply available for the second purpose being reduced, 
the marginal utility or value for that purpose is increased. In the 
case of gold, whatever is used as money is deducted from the 

lit is estimated that at the present time (1Q21) there are approximately 
seven dollars of credit instruments of various kinds for every dollar of gold 
reserve. This would indicate that it takes only one seventh as much gold to 
do the work as would be necessary, at the same scale of prices, if there were 
no credit instruments. 



MONEY 383 

supply available for use in the arts. If the total supply of gold 
were to remain the same, while gold should cease to be used 
as money, the supply available for use in the arts would be 
increased, and its value would of necessity fall. 

It may be objected that if the demand were to be reduced, 
less would be mined, and the supply also would be reduced. 
Unless the failure to use gold as money actually made it 
cheaper, there would be on that account no falling off in the 
amount produced. To the miner it would be a matter of indif- 
ference whether the mints were closed to his product or not, 
provided he could sell it as well as ever. But if the driving of 
gold out of circulation and into the arts should result, as it 
certainly would, in cheapening gold, the latter would occasion 
a falling off in the amount produced. But this falling off 
would take place on the margin of production. In other words, 
those sources of supply, which would otherwise be worked at 
the greatest cost would now not be worked at all. Only the 
better sources of supply would continue to be worked where 
gold could be produced at a cost not greater than its reduced 
value. Thus, even the marginal cost of producing gold under 
the new conditions would be reduced to correspond to the fall 
in its value. 

Two uses for gold. It is easy to see that under the free and 
gratuitous coinage-of the standard money the value of the money 
metal must be the same in coin as in bullion. It is perhaps not 
so easy to see how the distribution of the metal between the 
currency and the arts is determined. What proportion of the 
existing supply of gold at any given time shall go into circula- 
tion as money and what proportion into the arts, and what 
determines these proportions? This is a part of the general 
question of the distribution of any commodity between its 
different uses. It will always tend to forsake that use where its 
value is least and seek that one where its value is greatest, and 
thus keep the value normally the same in all. This means that 
gold will tend to distribute itself between its two general uses 
in such proportions that its marginal utility or value will be the 



384 PRINCIPLES OF NATIONAL ECONOMY 

same in each. If for any reason too much gold should for a 
time go into circulation and too little into the arts, until people 
needed bullion more than they needed coin, bullion would tend 
to rise in value and coin to fall. This would not only keep the 
new supplies of gold from going to the mint but would also 
send coin to the melting-pot. On the other hand, if too little 
gold should for any reason go into circulation and too much 
into the arts, until people needed coin more than they needed 
bullion, gold would be sent to the mint in larger quantities 
until the equilibrium was restored. But if considerable delays 
or expenses were involved, coin would be certain to command 
a temporary premium or, as it would appear in market quota- 
tions, bullion would be at a discount. On the other hand, if the 
process of reducing coin to bullion were a difficult and expen- 
sive one, coin might be at a discount and bullion at a premium 
when, for any reason, too much gold had been made into coin. 

Probably the opponents of the quantity theory would admit 
that the distribution of gold between the arts and currency 
takes place in some such manner as that just described. But to 
admit that is to admit a quantity theory. To admit that the 
share of gold which goes into the currency is determined auto- 
matically by the needs of business is to admit that the number 
of units in circulation as money has something to do with the 
value of each unit. What is to prevent all the new supplies of 
gold from going to the mint to be made into coin except the 
tendency which would be created for coin to fall and bullion to 
rise in value ? Why should any conceivable degree of scarcity 
of coin induce bullion owners to go to the trouble of sending 
their bullion to the mint except a tendency of coin to rise in 
value as compared with bullion? 

Hitherto this discussion has been based upon the assumption 
that gold, or standard money, formed the only kind of currency, 
— that there was no credit currency. When we come to consider 
the effect of substitutes for standard money upon the value of 
gold, it is manifest that, when a great many substitutes for the 
gold coin come into use, there will be less demand for gold for 



MONEY 385 

the purpose of coinage. This tendency shows itself in the 
disappearance of gold coin as the number of substitutes in- 
creases. In other words, the increase in the number of sub- 
stitutes for gold operates for a time in precisely the same 
way as an abnormal increase in the number of substitutes for 
anything else. 

Gresham's law. This tendency of a cheaper substitute to 
drive out a more expensive one is not peculiar to money. As- 
suming that the cheaper article is a real substitute and serves 
the user's purpose just as well as the dearer article, it will almost 
invariably drive out the dearer. The tendency of cheap money 
to drive out dear money is called Gresham's law, from Sir 
Thomas Gresham, who is commonly supposed to have pointed 
it out in 1650. When a cheaper form of currency is legal tender 
it serves the purpose of a debtor quite as well as the dearer ; 
that is, it will pay a debt quite as effectually. The creditor 
can't help himself ; besides, he can turn around and force his 
own creditors to take it. If the government will accept it for 
taxes and other dues, it serves the taxpayer's purposes quite 
as well as the dearer money. If there is enough of the cheaper 
form of currency to serve all these purposes, it tends to be used 
exclusively. The dearer form then tends to disappear from 
circulation because there is no effective demand for it. 

The quantity th6ory. That there is a connection between 
the quantity of money in circulation and the purchasing power 
of each money unit there can be little doubt. That the quantity 
is the only factor or even the principal one in determining the 
purchasing power of each unit is at least doubtful. How im- 
portant the factor of quantity is in the determination of the 
purchasing power of money or the general price level of com- 
modities has been the subject of much controversy. Those 
who hold to what is known as the quantity theory affirm that, 
with a given number of commodities to be purchased, the 
quantity of money is the chief factor in determining its pur- 
chasing power. Those who oppose it affirm that the quantity 
of money is a minor factor. 



386 PRINCIPLES OF NATIONAL ECONOMY 

Speed of circulation. Both sides agree that the speed of cir- 
culation is also a factor; that is, a small number of dollars 
moving rapidly from person to person may buy as many things 
in a given time as a larger number moving slowly. Money, how- 
ever, having no organs of locomotion, does not move of itself. 
A piece of money moves from one person to another only when 
the one who has it decides to buy something with it. It appears, 
therefore, that the speed of circulation depends on how rapidly 
people are buying. When they buy freely — never allowing 
any money to rest long in their pockets, cash drawers, or other 
places of deposit — it circulates rapidly; when, on the other 
hand, they are not buying freely but holding on to their money 
— keeping it as long as possible in their pockets, cash drawers, 
or other places of deposit — it circulates slowly. 

As a matter of fact, prices rise when buyers are trying to 
buy faster than sellers are willing to sell at existing prices, and 
fall when sellers are trying to sell faster than buyers are willing 
to buy at existing prices. Unless an increase in the quantity of 
money induces buyers to buy more or faster than they had been 
doing, it can have no effect on prices. The circulation merely 
slows down automatically. That is to say, if the people have 
more money and do not buy any more with it, they must neces- 
sarily hold on to it a little longer, carrying more at any one 
instant in various places of deposit or letting it lie idle. It 
is highly probable, however, though not necessary, that when 
people have more money they will spend it ; that is, they will 
begin to buy more than they did when they had less money. 
When this happens the increase in the quantity of money in 
circulation is followed by a general rise of prices. It is well to 
remember, however, that this rise of prices does not follow of 
physical necessity ; it only follows as a result of a probable 
increase of purchasing. There is an approach to physical neces- 
sity when the new money is put into circulation by the govern- 
ment in the purchase of unusual supplies, as at the beginning of 
a war. Here is a definite increase of purchasing which, unless 
balanced by a corresponding decrease of purchasing by private 



MONEY 387 

individuals, results in a necessary increase of total purchasing. 
This is certain to advance prices unless production is at once 
and for some independent reason speeded up correspondingly. 
Such a speeding up of production is not likely to happen except 
in response to rising prices. Even without any increase in the 
quantity of money, a similar increase in government purchasing 
is likely to increase the total amount of purchasing, and, if it 
does, it will tend to raise prices. Along with this rise of prices, 
and as an automatic result of increased purchasing without an 
increase in the quantity of money, there must come an increased 
speed of circulation. Again, it must be remembered that money 
has no power to increase its speed or to move at any speed ; it 
only increases its speed as a result of more active buying. 

Credit and the speed of circulation. It is not uncommon to 
assume that buying on credit increases the speed of circulation ; 
that is to say, with a given quantity of real, tangible money 
much more buying can be done if credit is highly developed 
than if it is not. If we care to assume that a dollar moves 
faster when it lies still in a bank as a part of the bank's reserve, 
while several dollars in checks are being drawn against it, than 
it could if it were actually moving physically from person to 
person, there is no positive harm in doing so. It would probably 
be just as clear, however, to say that much purchasing is done 
with promises to pay money, thus economizing in the use of 
real money. How these promises are made to do a part of the 
work of money will be described in the chapter on Banking 
and Credit. At this point it may be said, however, that buying 
sometimes speeds up through the enlarged use of credit, or 
buying with promises to pay money, when men literally buy 
before they have the money to pay for their purchases. At other 
times buying slows down because sellers lose confidence in 
buyers' promises and will not accept them. Buyers must wait 
till they get some real money before they can buy. All varia- 
tions in the rate of buying, whether they come through an in- 
crease or decrease in the quantity of real physical money, 
through a mere change in the willingness of people to spend 



388 PRINCIPLES OF NATIONAL ECONOMY 

what money they have, through government purchases of un- 
usual quantities of material^ or through the enlarged or con- 
tracted use of credit, will tend to produce corresponding 
changes in the general scale of prices or the general purchasing 
power of a piece of money of a given denomination. 

So long as the government pursues the policy of keeping all 
forms of money on a parity with gold there can never be any 
fluctuation in the purchasing power of money except as gold 
bullion fluctuates in value. If gold bullion rises in value, so 
must gold coins and every other form of currency; if it falls, 
they must all likewise fall. As a matter of fact, gold bullion 
fell steadily in value for more than twenty years preceding 
1920 ; consequently money fell in value or purchasing power — 
in other words, prices rose steadily. In recent months gold and 
money rose and prices fell. We iieed not here inquire why gold 
rose or fell ; it might be because of factors affecting its demand 
or supply or it might be because of factors affecting other 
commodities. 

These fluctuations must be expected to continue so long as 
bullion changes in value and the standard dollar contains the 
same quantity of gold. Professor Irving Fisher proposes, there- 
fore, to stabilize the purchasing power of the dollar by changing 
the amount of gold in it from time to time. When gold rises in 
value, put less in each dollar ; when it falls in value, put more 
in each dollar. Of course it would require very careful statis- 
tical Calculation to know just the right amount of gold to add or 
subtract from time to time, but this difficulty, while great, is 
not insuperable. If some other difficulties could be removed 
it would doubtless be possible to calculate the right amount of 
gold to put into the dollar from day to day to give it practically 
the same purchasing power at one time as at another. 

Another difficulty, apparent rather than real, is that of hav- 
ing coins of different weight in circulation at the same time. 
This is easily overcome by not coining any gold at all, but sub- 
stituting gold certificates. At the present time one can take 
gold bullion to the Treasury and leave it on deposit, receiving a 



MONEY 389 

sort of warehouse receipt known as a gold certificate. Some 
prefer this even now to gold coin. When the certificate is pre- 
sented, the same weight of gold is returned as was deposited. 
Under the new plan not the same weight but the same value 
would be returned as was deposited. The gold certificate, there- 
fore, would always call for such a weight of gold as would have 
the same value as that which was deposited. There would be 
no serious difficulty in managing this. 

Two real difficulties present themselves. First, the govern- 
ment would be making a profit or incurring a loss according as 
the value of gold went up or down. When the value goes up, 
the government would not have to return to the holder of gold 
certificates as many ounces of gold as were deposited when the 
certificates were issued. It would therefore have some gold left. 
There would be some difficulty in knowing what to do with it, 
but probably some new certificates could be issued against it 
and used to pay a part of the running expenses of government. 
On the other hand, when gold continues to fall for a long period, 
as it did before 1920, the government will incur a loss. It would 
find that it had constantly to return more ounces of gold than 
were deposited. In short, it would have to go out and buy gold 
to replenish its stock and enable it to redeem its gold certificates. 
Even this might be worth doing if it would stabilize prices. 

A more serious difficulty arises with respect to foreign trade. 
Unless an international arrangement could be entered into, 
foreign exchange would be in a hopeless muddle. It would re- 
quire a statistical expert and a quick calculator to tell at any 
time what the pound sterling or the franc was worth in dollars. 
It is hard enough now, but it would be almost impossible then. 
This is probably the most serious difficulty, unless it can be 
removed by an international arrangement. 

"Why not stabilize gold ? Until such an international agree- 
ment can be arranged, it is doubtful if any single country can 
be induced to make this experiment. Meanwhile, something 
can be done toward stabilizing the purchasing power of gold 
itself by any nation that thinks the stabilizing of prices im- 



390 PRINCIPLES OF NATIONAL ECONOMY 

portant enough to be worth the trouble. In so far as the pur- 
chasing power of gold can be stabilized, that in itself will 
stabilize the dollar without changing the quantity of gold in it. 
Something can be done in this direction by a skillful handling 
of the problem of credit and credit currency. 

It was shown earlier in this chapter that the enlarged use 
of credit enables a country to carry on a given amount of busi- 
ness with less gold than would be necessary if no credit or less 
credit were used. This furnishes a clue to the solution of the 
problem. If the use of credit were restricted, it would take so 
much gold to do the money work as to affect appreciably the 
total demand for it. So much would have to be withdrawn 
from the arts to supply the need for currency as to make a gen- 
uine scarcity. The users of gold in tlje arts would have to bid 
for it in order to hold an adequate supply. This would tend 
to give it a higher purchasing power. 

Since about 1897 the purchasing power of gold the world over 
fell continually until 1920. This was doubtless due mainly to 
remarkable increase in the world's production of gold which 
began about ten years earlier. At the same time, however, the 
use of credit instruments had been growing in the principal gold- 
using countries, and a smaller percentage of the world's busi- 
ness was being transacted with actual gold as the medium 
of exchange. This tended to reduce the demand for gold 
below what it would otherwise have been. These two forces, 
working together, produced a steady decline in the purchasing 
power of gold and a steady rise in commodity prices. 

During the World War there was a phenomenal increase in 
the use of credit currency which resulted in the almost complete 
nonuse of gold. The principal gold-using countries of Europe 
practically abandoned the gold standard, at least temporarily, 
and went on to a paper-money basis ; that is, they issued such 
quantities of credit currency and sent such quantities of gold 
abroad in international payments as to make it impossible to re- 
deem paper with gold. Paper money of course depreciated, even 
in terms of gold, and prices in those countries, quoted in terms 



MONEY 391 

of depreciated paper currency, soared much higher than in this 
country, where prices continued to be virtually gold prices, 
since we maintained the parity of gold and paper. Those 
European countries practically released all their gold and 
threw it onto the markets of the world, much of it coming to 
this country, literally flooding our market with it. 

In the United States we found ourselves with more gold than 
we knew what to do with. Instead of using this vast supply of 
gold as currency, which would seem to have been the part of 
wisdom, we took pains to use very little of it, using, instead, 
more credit currency than ever, especially in the form of 
Federal Reserve notes. The monetary policy seems to have 
been aimed principally or almost exclusively at the mainte- 
nance of the parity of gold and paper and not at all at the 
maintenance of stable prices or at stabilizing the purchasing 
power of gold. We seem to have taken some pride in the fact 
that our paper currency has not depreciated in terms of gold, 
overlooking the fact that gold itself depreciated in terms of 
commodities. The fact that any kind of a dollar will purchase 
as much as a gold dollar is of course a matter of some impor- 
tance, but it would have been much more satisfactory if the 
gold dollar had not lost so much of its purchasing power and 
prices had not risen to such unprecedented heights. If the 
increased volume, of business occasioned by the war had been 
carried on without any increase, or even with some decrease, of 
our credit currency, it would have taken so much gold to do 
the work — in other words, it would have so increased the 
demand for gold — as to give it a purchasing power much 
higher than it had. "We should thus have been saved from the 
enormously inflated prices of the war period and the train of 
evils that followed them. 

That there would have been some difficulties with such a 
policy goes without saying. It is merely a question whether 
we think that the evils of inflation and deflation are serious 
enough to justify the cost of preventing them or not. In order 
to stabilize or help to stabilize the purchasing power of gold 



392 PRINCIPLES OF NATIONAL ECONOMY 

it is necessary that the use of it or the demand for it shall 
increase in times when its value is falling and decrease when its 
value is rising. The way to increase the demand for it when its 
purchasing power is falling and commodity prices are rising 
is to use fewer substitutes, thus forcing people to use more gold. 
The way to decrease the demand for it when its purchasing 
power is rising and commodity prices are falling is to use more 
substitutes and release some of the gold from circulation. 
In other words, when commodity prices are rising (which 
means that the purchasing power of gold is falling), credit 
currency should be reduced until the increased demand for gold 
would arrest its further fall ; and when commodity prices are 
falling, more credit currency should be issued until the decreas- 
ing demand for gold would arrest its further rise. This would 
require not only expert statistical calculation and management 
but also great wisdom on the part of the people to avoid polit- 
ical tinkering with the process, but the difficulties are inher- 
ently no greater than those involved in changing the quantity 
of gold in the dollar. 

Two kinds of elasticity. One of the first difficulties is a 
purely educational one ; namely, that of correcting our ideas 
of an elastic currency. As ordinarily used, that term means 
a currency that expands when business is unusually active 
and contracts when business slows down. Such a currency 
is said to respond to the needs of business. When buyers are 
active and anxious to buy a great deal, this kind of a currency 
gives them the means of buying. When buying is inactive 
and buyers are not trying to buy much, they do not need so 
much money, and it should therefore decrease in quantity. 
It is commonly assumed that this adjustment of the supply of 
money to the demand for it is desirable. It is not improbable 
that over long periods of time more business will be done, with 
less inconvenience and friction, when the currency behaves in 
this way than when it behaves otherwise. It enables people to 
"make hay while the sun shines," to ''get while the getting is 
good," etc., but it also forces them into periods of inaction and 



MONEY 393 

business stagnation. In short, this sort of elasticity in the cur- 
rency increases business activity when it is active and retards it 
when it slows down. The policy outlined in the preceding pages 
would do the opposite ; that is, it would retard business activity 
when it was active and stimulate it when it showed a tendency 
to slow down. It is a question whether this is not a better 
kind of elasticity. 

As to the actual methods by which credit currency can be 
made to decrease, or kept from increasing when business is 
very active, an easy but not very effective method is that of 
changing the rate of bank discount. When business is active 
and the demand for bank credit keen, the banks would natu- 
rally, if they were permitted to follow their own interests, raise 
their rates of discount, which means, virtually, that they would 
charge a higher rate of interest on their loans. This would 
have the effect of discouraging borrowing and reducing the 
use of bank credit below what it would be if rates were 
low. Again, when business is inactive and the demand for 
loans decreases, the tendency is to lower the discount rates 
or to lend bank credit on easier terms. The Bank of England, 
for many years before the World War, exercised great control 
over the monetary situation by pursuing this simple policy. 
Our Federal Reserve Banks have performed the same function 
to a certain exter\t, though sometimes interfered with by the 
mistaken policy of the Secretary of the Treasury. 



CHAPTER XXVIII 
BANKING 

Promises to pay. Where business is done on the basis of 
voluntary agreement among free citizens it is probable that 
many kinds of agreement will be made. Among these many 
forms there will probably be promises to pay money or to de- 
liver some desirable object at some future time. In order that 
such promises may be accepted, one or both of two conditions 
must exist. First, and most important, the receiver of a 
promise may have confidence in the maker of the promise, both 
as to his honesty and his ability to fulfill his promise. Second, 
the receiver of the promise may have confidence in the power 
and the willingness of the government to compel the maker of 
the promise to keep it. Unless one or both of these forms of 
confidence should exist, promises to pay are not likely to have 
much value or to be accepted widely. 

Need of institutions to deal in promises to pay. In all coun- 
tries where confidence exists (that is, where men are generally 
honest and governments reasonably efficient) these promises 
come to play a large part in free and voluntary exchange. The 
mass of such promises and the habit of dealing in them have 
come to be called the system of credit. The most common of 
these promises are promises to pay money. So common have 
they become, and there is so large a volume of them, that 
they call for special institutions or business establishments to 
deal in them. These establishments are now called banks. The 
term "bank" originally meant the bench before which the 
money changer sat, with his coins stacked up before him. 
When he failed in business his bench was broken up, hence 
the word "bankrupt." 

394 



BANKING 395 

Receiving deposits and making loans. The original business 
of the bank was ostensibly to deal in money, but out of this 
has grown the business of dealing in credit or promises to pay 
money. Lombard Street became the banking center of Lon- 
don, from the fact that it was occupied by goldsmiths from 
Lombardy. They had to have safes to store their valuables. 
During the turbulent times of the sixteenth and seventeenth 
centuries certain worthy Londoners used to deposit not only 
their valuables but their money with these goldsmiths for 
safe-keeping. Having so much money on hand, the goldsmiths 
began gradually to lend out small sums, always taking precau- 
tions to keep, enough on hand to meet the demands of depositors 
whenever they were presented. This business of receiving de- 
posits and making loans, which is the essence of all banking, 
eventually became more lucrative than the trade of the gold- 
smith. More and more, therefore, they gave up their original 
trade and became dealers in money and credit ; that is, receiv- 
ing deposits and making loans. These two things are still the 
fundamental purposes of a bank. The depositors came to 
recognize the legitimacy of this business, and it became respect- 
able and well established and is now one of the most important 
of all forms of business. 

Elements of safety. When a bank has many depositors to 
whom it owes money and many borrowers who owe it money, it 
is, if properly managed, a safe business for all concerned. The 
depositors to whom the bank owes money are not likely to 
want it all at once. All the bank has to do is to see that it 
has in its vaults every day a little more money than its deposi- 
tors are at all likely to want on that day. When the bank is 
properly managed, its promises to its depositors are always 
good, and the depositors can always get their money when they 
want it. At the same time all the promises to pay which it has 
received from borrowers are always good, and the borrowers 
will pay back the money the day it is due. 

In order to understand how a depositor is safeguarded, it is 
necessary to go a little more into detail. In the case of a state 



396 PRINCIPLES OF NATIONAL ECONOMY 

bank, all the property of the bank is ultimately available for 
the payment of the depositors ; that is, if the affairs of the bank 
are wound up, every depositor must be paid in full before 
the owners or shareholders get anything out of it. In the case 
of a national bank the bank notes which it has issued take 
precedence, but these are secured by special forms of prop- 
erty (such as government bonds and other securities) which 
it has deposited with the Federal Reserve Board. All the 
other property of the bank is then available, as in the case 
of the state banks, for the payment of the depositors. In ad- 
dition to this, each shareholder may be assessed an amount 
equal to the par value of his shares in order to pay deposi- 
tors. Thus the shareholders, or owners, may lose all that they 
originally put into the business, plus an equal amount, before 
any depositor can lose anything. This makes the depositor 
relatively safe. 

Reserves. Let us now see in what the property of the bank 
consists. In the first place, there is what is called the reserve. 
This consists either in cash on hand or in part cash on hand 
and part deposits in the Federal Reserve Bank. This reserve 
is required to bear a certain ratio to the total cash obligations 
of the bank, and in normal times is always ample. It is obvi- 
ous, however, that if an abnormally large number of depositors 
were to demand payment at the same time this reserve would 
be exhausted ; that is to say, the bank would have no cash left. 
Unless the bank could get extra supplies of cash, depositors 
would then have to wait until some of the other property of 
the bank could be turned into cash. 

This other property, however, is mainly in the form of loans 
of various kinds and would be ample unless there had been 
fraud or bad management. Since most of these are short-time 
loans, they are being paid from day to day, and cash is rapidly 
flowing in. Normally this would replenish the cash reserve in 
a few days. In fact, the bank can usually call loans in rapidly 
enough to keep its cash from being exhausted even by an 
abnormal demand. In addition to these short-time loans, there 



BANKING 397 

are usually a few long-time loans and other securities. If these 
are exhausted and the affairs of the bank have to be wound up, 
the real estate and office fixtures may be sold. If these are not 
enough the owners of the bank may be assessed, as indicated 
above, in order further to safeguard the depositors. In short, 
nothing except fraud or bad management could cause a deposi- 
tor to lose any portion of his deposit. 

Making money more active. While, as stated above, the es- 
sential work of a bank is to receive deposits and make 
loans, by doing these things it performs certain important func- 
tions in the national economy. One of these functions is to 
take money which would otherwise have remained inactive and 
put it to work. The individual who has a fund of purchasing 
power which he does not care to invest for the time being may 
deposit it with a banker ; someone else who has an opportunity 
for investment (that is, for the active use of capital) may go 
to the banker and borrow it. The- banker is, therefore, the 
middleman who stands between the one who has money to 
spare for which he has no immediate need and the one who 
has a need for capital which he does not possess. Without the 
banker these two men might have difficulty in finding each 
other. The banker at least saves them time and trouble. It is 
very much the same function as that performed by any other 
middleman. The, producer of material products does not have 
time to peddle his goods among consumers, and the consumer 
does not have time to search for a producer who has for sale 
exactly what he wants to buy. Both go to the merchant, the 
one to sell his surplus, the other to buy his supplies. The mer- 
chant saves both of them the trouble and earns an income in 
return for the service which he performs. 

Savings banks. The depositor may prefer to leave his money 
on deposit for a long time or for a stated time, or he may 
prefer to deposit it on condition that he may withdraw it 
at any moment when it suits his convenience to do so. The 
former class of deposits are commonly called savings deposits ; 
and the latter, deposits subject to check. The savings banks 



398 PRINCIPLES OF NATIONAL ECONOMY 

are a special class which receive savings deposits, whereas the 
ordinary commercial bank receives deposits subject to check. 

Trust companies. Trust companies were originally formed, 
as their name implies, to act as trustees ; that is, they would 
take care of valuable papers, such as mortgages and other 
securities, collect interest on them, pay obligations when due, 
execute wills and bequests, handle estates for people who needed 
or desired to be relieved of the work, and perform a great 
many other similar tasks. In the course of this work they 
naturally had to handle a great deal of money. At one time 
they kept this money in regular banks, but in recent times they 
have generally kept it in their own vaults or have loaned a 
part of it on ordinary commercial loans. This means that they 
have been doing a regular banking business in addition to the 
business of a trust company as originally conceived. In fact, 
it is not, at the present moment, easy to distinguish a trust com- 
pany from any other commercial bank. 

Origin of the bank check. Originally, when a depositor who 
had money in a bank wished to make a payment to another 
person, it was necessary for the depositor to withdraw his 
money from deposit and hand it to the payee. A little later 
the custom grew up of going in person to the bank and authoriz- 
ing the bank to transfer a certain sum from the payer's to the 
payee's account. The payee could then draw out the money 
as he needed it. From this it was an easy step to the custom of 
giving the bank a written order to pay a certain sum to another 
person. This written order became known as a bank check. 
These checks proved so convenient that they became one of the 
principal means of making payments. A, who wishes to pay 
money to B, merely hands a check to B, — a written order on 
the bank. B may then withdraw the money, or he may deposit 
the check and have the sum transferred from the payer's account 
and credited to his own account, or he may indorse the check 
and pass it on to a third person. This third person may pass it 
on to a fourth, and so on almost indefinitely. Sooner or later, 
however, some individual who receives the check will deposit it 



BANKING 399 

with his own bank. If it happens to be the same bank on which 
it was originally drawn, the matter of transferring the account 
is very simple ; if it happens to be another bank, and there hap- 
pen to be a great many banks in the same business center, each 
one receiving in the course of the day's business a great number 
of checks on all the others, a somewhat complicated problem is 
certain to arise. This is the problem of bank clearings. A bank 
draft is merely a check on one bank drawn by another bank. A 
certified check is a private check to which the bank on which it 
is drawn certifies or the payment of which it guarantees. 

The clearing house. The vast increase in the use of bank 
checks in the making of payments long ago created the neces- 
sity for a special institution known as the clearing house. At 
the close of each day's business every bank in a large commer- 
cial center finds itself in possession of a number of checks on 
each of the other banks. Originally messengers were sent the 
rounds, carrying bundles of checks. This was both a cumber- 
some and an expensive process. In order to save time and 
shoe leather these messengers formed the habit of meeting at 
certain places at certain hours and exchanging their bundles of 
checks, keeping records of all such transactions. By this simple 
process the messenger from one bank would receive all the 
checks on his own bank from the messengers from the other 
banks, and at the same time he would deliver to the messengers 
from each of the other banks the checks on their respective 
banks deposited with his bank. 

From this it was an easy transition to the organization of a 
regular clearing house, which eventually became the heart of 
the whole financial district. The late Charles F. Dunbar de- 
scribes the process as follows : ^ 

This medium of payment acquires great perfection wherever the 
clearing-house system is adopted. Under this system there is a daily 
meeting of clerks representing all the banks carrying on business at 
any common center. Every bank there turns in at a central office 

^The Theory and History of Banking (third edition, enlarged by Oliver 
M. W. Sprague). G. P. Putnam's Sons, New York and London, 1917. 



400 PRINCIPLES OF NATIONAL ECONOMY 

all the checks and cash demands which it holds against others, and 
is credited therewith, and is also charged with all checks and demands 
brought against it in like manner by others. The checks and de- 
mands which have thus been credited to and charged against each 
bank are then summed up, and the balance found to be owed by or 
due to each bank, as the case may be, it then pays to or receives from 
the central office in money. By this means a great mass of trans- 
actions, which would otherwise require a series of demands by each 
bank upon every other in the same place, are settled at once, and the 
transportation of large sums in cash from one bank to another is to 
a great extent dispensed with. 

The bank deposit, circulated by means of checks, is the most con- 
venient medium of payment yet devised. A stroke of the pen trans- 
fers it in whatever amount is needed for the largest transaction, and 
this transfer instantly becomes the basis for fresh operations, with 
as complete security against accidental loss as can be imagined. In 
the strict economic sense this medium no doubt has rapidity of cir- 
culation in a high degree, while in the sense of actual activity of 
movement in a given time it far outstrips money or notes, and has 
been well said to be the most volatile of all the mediums of exchange. 
Of the entire circulating medium of this country, it forms incom- 
parably the greatest, although the least considered, part. Depending 
for its efficiency solely upon convention, it for the most part eludes 
the regulations which legislatures so industriously enforce upon the 
other constituents of the currency. Indeed, beyond the requirement 
of a minimum reserve made by the law of the United States, and of 
most of the several states, we may say that the subject is not touched 
by legislation, in this country or elsewhere. The necessity for pay- 
ment in specie or legal-tender paper upon demand, the chief safe- 
guard of value, is the result of general provisions for the payment of 
debts of any kind. And the chief assurance against excessive ex- 
pansion on the part of any single bank or banker is given by the 
certain demand for prompt and frequent settlement occasioned by 
the voluntary establishment of the clearing house, or by the habits of 
the community, but not by law. 

Since the above wsls vi^ritten, the Federal Reserve Act has 
been passed and the Federal Reserve system put into opera- 
tion in the United States. Dunbar's description of the essential 



BANKING 401 

methods of clearing still applies, but most of the bank clearings 
in this country are now done through the Federal Reserve 
Banks. The clearing house is essentially a banker's bank, where 
banks make their payments to and collect their obligations 
from one another very much as private individuals who do 
business with the same bank make their payments to and col- 
lect from one another. The Federal Reserve Banks are now in 
a peculiar sense fitted to act as the bank for the member banks, 
thus taking the place of the clearing house. 

When you make a payment to someone in another city with 
whom you have business relations or who knows you and your 
solvency, a very convenient method is to send him a check on 
your own local bank. He will then present your check to his 
own bank for collection. His bank will usually credit him at 
once with the amount for which the check is drawn and then 
send the check through a regular groove. Usually it will send 
the check to the Federal Reserve Bank of its district, and this 
Federal Reserve Bank will send it either to the bank on which 
it is drawn or, if that bank is in another district, to the Federal 
Reserve Bank of that district, which will, in turn, send it to 
the bank on which it is drawn. When the check gets back to 
you, you can trace its course by the indorsements on its back. 
Sometimes the banks find it necessary to charge a small fee for 
collecting a check' of this kind. 

Bank checks do not circulate quite so freely among private 
individuals as money, because each check must be indorsed by 
each person through whose hands it passes. Therefore a check 
will be accepted only from a person whose signature is known 
to be genuine. Since, however, paper money circulates without 
indorsement, one will accept it from a stranger or a known 
rogue unless one has reasons for suspecting the money to be 
counterfeit. 

Domestic and foreign exchange. This habit of making pay- 
ments by means of bank checks has extended beyond the limits 
of any city or of any country. Business transactions between 
cities and between countries are carried on in much the same 



402 PRINCIPLES OF NATIONAL ECONOMY 

way. This necessitates some convenient way of balancing pay- 
ments from one city to another and from one country to an- 
other. The one method is known as domestic and the other 
as foreign exchange. If a man in one city, say Chicago, must 
pay for goods which he has bought in New York, and another 
man in Chicago is to receive an equal amount of money for goods 
which he has sold to someone in New York, it would be much 
simpler for the first man to pay the second man, thus canceling 
both debts, than for money to be sent both ways. Domestic 
exchange is merely a system on which this can be done on a 
large scale between all the large cities. If the men in question 
live in different countries as well as in different cities, the same 
problem arises and is complicated by the difference in the mone- 
tary systems of the different countries. 

It will frequently happen that, for a time, more money is 
owed by citizens of one country, say the United States, to 
citizens of another, say England, than is owed by citizens of 
England to those of the United States. In such cases the debts 
do not exactly cancel one another. If Americans owe more to 
Englishmen than Englishmen to Americans, there is said to be 
an unfavorable balance of trade in America and a favorable one 
in England ; that is, some money must flow from America to 
England to pay the balance and in the opposite direction if the 
balance of trade is unfavorable to England and favorable to 
the United Slates. Rather than send money to England, when 
the balance is against us, paying the cost of transportation and 
losing the use of it for a time, those Americans who owe the 
money will try to find others who have money coming to them 
from England and will even offer a small premium for bills on 
England. English, or sterling, exchange is then said to be above 
par ; that is, the American who is to receive an English pound 
can sell his claim for a little more than I4.8665, which is its 
par value in American money. When the balance is the other 
way sterling exchange is below par ; that is, the man who has 
to wait and get his money from England will sell his claim for 
a little less than $4.8665 for each pound sterling. During the 



BANKING 403 

World War the English people had nothing to sell to us and 
much to buy from us. The balance was so overwhelmingly 
against them as to exhaust all their available gold, and they 
could not make any payments at all for a long time. The 
pound sterling naturally fell far below par, as it must in all 
such cases, depending on the probable lapse of time before trade 
can again reach a normal balance. 

Dealers in foreign exchange are merely middlemen who buy 
and sell these obligations between countries. The man who 
has money coming to him from another country does not have 
to find a man who owes the same amount of money to the other 
country ; he merely sells his claim to one of these dealers. 
Similarly, the man who owes money to another country does 
not have to find a man who has the same amount coming to 
him from the same country. He merely goes to one of these 
dealers and buys a claim to cancel his own obligation. It is 
largely through these dealers in foreign exchange that inter- 
national payments are made with very few shipments of money. 

Bank notes. Certain banks, such as national banks, have 
been permitted to perform the special function of issuing bank 
notes and thus providing a circulating medium which answers 
the purpose of money if it is not itself a form of money. These 
notes haye circulated from hand to hand in all respects as 
money. They differ from the notes of an ordinary individual 
in that they pass from hand to hand without indorsement. The 
note of an individual may circulate to a certain extent, but the 
laws and customs of business require that it be indorsed by 
everyone through whose hands it passes. In that important 
respect the private note differs from money. It is the custom 
for a modern bank note to pass from hand to hand in full pay- 
ment of all obligations without indorsement and without any 
regard to the honesty or credit of the individual who offers it 
in purchase of a commodity or in payment of a debt. 

The Bank of England. In some historic cases this custom of 
issuing notes has grown up without the authority of the govern- 
ment and without any special help from the government, precisely 



404 PRINCIPLES OF NATIONAL ECONOMY 

as the custom of receiving deposits and making loans has arisen. 
In most modern countries, however, where bank notes are 
allowed to circulate, they are not only authorized by law but 
very carefully supervised and safeguarded. The Bank of Eng- 
land, for example, occupies a position with respect to the British 
government somewhat similar to the position which an ordinary 
bank in this country occupies with respect to one of its largest 
customers. The British government maintains no separate 
treasury of its own, but deposits any surplus money which it 
may have with the bank, just as a private firm deposits its sur- 
plus money with its own bank. The British government makes 
its payments by orders on the bank, very much as a private firm 
would make its payments by check on its own bank. When the 
British government desires to borrow money, except in ex- 
traordinary cases, it has generally borrowed through its own 
bank, the bank merely serving as the agent of the government 
in this respect. 

In return for various services which the bank has performed, 
it has been permitted to issue bank notes up to a certain extent 
(£17,775,000) secured by debts of the government to the bank 
and to keep them in circulation very much as other forms of 
money are circulated. Beyond this quantity it was permitted 
to issue notes only under the most rigid restrictions. All its 
additional notes, in normal times, are virtually warehouse re- 
ceipts similar to our gold and silver certificates ; that is to say, 
for every note issued, an equivalent in gold has had to be de- 
posited with the bank. These notes were merely conveniences 
to the general public. An individual who did not wish to carry 
a large quantity of gold could take it to the bank, deposit it, 
and get notes instead. The notes are issued only in large denom- 
inations. Since the outbreak of the World War the restrictions 
upon the issue of notes have been removed, so that, for the time 
being, the Bank of England is permitted to issue notes at will. 

The old Bank of the United States. In this country the old 
Bank of the United States was chartered in 1791 for twenty 
years. A new charter was refused in 181 1, and it went out of 



BANKING 405 

existence. A second bank, similar to the first, was chartered 
in 181 6, to run for twenty years. Both these banks served 
much the same purpose as the Bank of England ; that is, the 
United States Bank was in a sense the banker of the Federal 
government. It went out of existence, however, in 1836, having 
failed to secure a new charter, partly through the opposition 
of President Jackson. 

The national banking system. In 1863 the foundation of 
our present national banking system was laid and a series of 
national banks was created, partly as a means of making a 
market for the bonds which the Federal government was offer- 
ing for sale in order to get money with which to carry on the 
Civil War. Any bank chartered under this act was permitted- 
to deposit bonds of the United States with the Secretary of the 
Treasury, and in return for these deposits it was permitted to 
circulate bank notes up to 90 per cent of the value of the bonds 
deposited. Thus, if the bank failed, the government had pos- 
session of enough of its property to redeem all the notes which 
it had issued. In a sense the bank had pawned valuable prop- 
erty (that is, government bonds) and received a kind of pawn 
check in return. These ^^ checks," called bank notes, it was per- 
mitted to circulate. This is essentially the characteristic of our 
bank notes to the present day. Subsequent acts have made 
some changes in the system, particularly the act of 1908, which 
permits a national bank to deposit certain other securities be- 
sides United States bonds as a basis for its note circulation. 

The Federal Reserve system. The most important piece of 
banking legislation in this country since the National Bank Act 
of 1863 was the Federal Reserve Act of 1913. Under this act 
there was created under the Treasury Department of the United 
States a Federal Reserve Board consisting of five members 
besides the Secretary of the Treasury and the Comptroller of 
the Currency, charged with the general administration of the 
national banking system. The country was then divided into 
twelve districts, and within each district a city was selected, 
to be called a Federal Reserve city. The cities chosen were 



4o6 PRINCIPLES OF NATIONAL ECONOMY 

Boston, New York, Philadelphia, Cleveland, Richmond, At- 
lanta, Chicago, St. Louis, Kansas City, Dallas, and San Fran- 
cisco. In each of these cities was organized a Federal Reserve 
Bank. This bank was to be the central bank of the Federal 
Reserve system in the district within which it was located. All 
the national banks, and all the state banks which wished to be- 
come national banks, by coming in under the Federal Reserve 
system, were to become member banks and, in a sense, tributary 
to the Federal Reserve Bank. They have a voice in the control 
of the Federal Reserve Bank of their own district. Each mem- 
ber bank is required to subscribe to the capital of and to keep 
all its required reserves on deposit with the Federal Reserve 
Bank of its district. The Federal Reserve Bank thus becomes, 
in a sense, the bank of the member banks of its own district. 
It does no business directly with private individuals, aside from 
the purchase of bills of exchange in the open market. The 
Federal Reserve Banks themselves carry on their clearing 
through a special branch of the Federal Reserve Board in 
Washington. This may be called the bank of the Federal 
Reserve Banks. 

General purposes. The general purposes of the Federal Re- 
serve system may be summarized under three heads : first, the 
provision of a general and well-organized market for the selling 
of commercial paper; second, the pooling of the reserves of 
existing banks ; third, the provision of an elastic currency. The 
first and second of these purposes are provided for partly by 
the requirement that each member bank shall keep a part of 
its funds on deposit with the Federal Reserve Bank of its dis- 
trict. In return for this the Federal Reserve Bank is to take 
commercial paper (that is, notes and other promises to pay 
money to the bank) and send it money instead. Thus, an 
individual who wishes to borrow money from the bank gives it 
his own personal note, properly secured. When the bank has a 
large batch of these notes and other obligations, and needs more 
cash, it can indorse these notes and "sell" them for cash to 
the Federal Reserve Bank. 



BANKING 407 

An elastic currency. The purpose of providing an elastic 
currency is carried out in the plan for the issuing of bank notes. 
Two classes of notes are provided for under the system : first, 
Federal Reserve notes and, second. Federal Reserve Bank 
notes. The Federal Reserve notes are issued to member banks 
by the Federal Reserve Banks in return for securities of various 
kinds. For example, when a member bank sends in a batch of 
personal notes and other obligations and asks for cash, it may 
get its cash in the form of Federal Reserve notes. These notes 
are issued to the Federal Reserve Banks themselves by a 
government official known as a Federal Reserve agent. Vast 
quantities of these notes have been issued, especially since the 
entrance of the United States into the World War. 

Not much use has been made as yet (1921) of the Federal 
Reserve Bank notes. They are based upon government bonds 
which are deposited with the Treasury Department, just as is 
the case with national bank notes. 

It is the Federal Reserve notes, rather than the Federal Re- 
serve Bank notes, which give elasticity to the currency. When 
business is active and the member banks are doing a large lend- 
ing business (that is, lending a great deal of money to in- 
dividuals and firms) they will, of course, have received as 
security many personal notes and other obligations. By send- 
ing them in large batches to the Federal Reserve Banks they 
get large quantities of Federal Reserve notes, which they pro- 
ceed to lend out, receiving other notes and obligations in turn. 
By repeating this process they put large quantities into circula- 
tion when money is needed or demanded. When the lending 
business is slack (that is, when there is not much demand for 
money) fewer of these notes are put into circulation. Thus the 
supply automatically adjusts itself to the demand. It is still 
an open question, however, whether this does not increase 
rather than decrease the tendency toward overexpansion of 
business at certain times and business depressions at other times. 

National and state banks. A national bank in this country 
is any bank which is chartered under Federal law as distin- 



4o8 PRINCIPLES OF NATIONAL ECONOMY 

guished from state law. With the exception of the first and sec- 
ond Banks of the United States, of the banks chartered under 
the National Bank Act (referred to above), and of those organ- 
ized under the present Federal Reserve system, all banks in the 
United States are chartered under state laws and are therefore 
state banks. Before the Civil War.many state banks issued bank 
notes. In many of the states the regulation and inspection were 
very inadequate, and the state banks were permitted to issue 
notes which they could not redeem ; that is, for which they could 
not exchange lawful money when they were presented. These 
came to be known as wildcat banks. Since the establishment of 
the national banking system during the Civil War the privilege 
of issuing bank notes has been reserved for banks chartered and 
controlled by the Federal government ; that is, for national banks. 

Agricultural credit. The business of agriculture has been 
the slowest of all to make a large use of credit. One reason 
has been the lack of machinery designed to provide the farmers 
with the kind of credit which they have needed, as the ordi- 
nary banks have provided the merchants and manufacturers 
with the kind which they have needed. The farmer needs 
comparatively little short-time credit, as the merchant and 
manufacturer understand that term. The bank which does 
a regular check and deposit business, whose deposit?^ are con- 
tinually being withdrawn and replenished, must keep its assets 
in liquid form. Farm mortgages are notoriously hard to dis- 
pose of, and no commercial bank would feel safe if it loaned a 
large proportion of its deposits out on that kind of security. 

Enlarged demand for capital. It was the mechanical inven- 
tor who, more than anyone else, created the vast opportunities 
for the use of capital in the modern world. This is as true 
of agriculture as of the other industries. The simple tools and 
equipment with which farming was done in former times in- 
volved very little preliminary outlay in order to begin farming 
on an equality with other farmers. Such implements as the 
farmer could not make for himself he could procure at a low 
cost from local mechanics. In old countries land has not com- 



BANKING 409 

monly been a matter of merchandise, and there was therefore 
little occasion for the farmer to invest heavily in land. Not 
having to invest heavily either in land or equipment, he re- 
quired little financial aid. In the United States, where land has 
been regarded as a salable commodity, it remained so cheap 
until quite recent times as to call for no heavy outlay on the 
part of the purchaser. In fact, under the public land policy 
of the Federal government the landless farmer could become 
a farm-owner at a merely nominal price or, under the Home- 
stead Law, without money and without price. Under such 
conditions, when farming was done with simple and inexpensive 
equipment and on cheap land, the problem of financing the 
farmer was a very simple one and did not call for a special 
sort of financial institution. 

Coming of agricultural machinery. Beginning about 1830 
a remarkable series of mechanical inventions began which 
brought about a transformation in agriculture somewhat similar 
to that which had taken place in manufacturing a half century 
earlier. They did not transform agriculture from an industry 
of small into an industry of large units, as happened in manu- 
facturing, but they did transform it from an industry in which 
capital had played a negligible part to one in which it was to 
play a major part. Power-driven farm machinery has become 
not only expensive but so very efficient that no farmer can now 
hope to succeed without it in competition with farmers who pos- 
sess it. This has transformed farming into a capitalistic indus- 
try and the farmer into a small capitalist. Somewhat earlier, 
however, the equipment of a cotton farm had required a consid- 
erable preliminary outlay because of the prevalence of slavery 
and the high cost of slaves. It is the necessity for a large prelim- 
inary outlay, and not the scale of production, which constitutes 
a capitalistic industry and creates the problem of financing it. 

Rising price of land. Even with the growing cost of equip- 
ment the problem of financing the farmer did not become so 
very acute until about the beginning of the present century. 
So long as there was good farm land in the public domain to 



410 PRINCIPLES OF NATIONAL ECONOMY 

be had for nothing, such land had remained cheap in all parts 
of the country. With the practical exhaustion of desirable 
free land, other lands began to rise rapidly in price. Tenancy 
in this country has never been considered as other than tempo- 
rary and abnormal. The average American farmer has always 
expected to own his farm sooner or later, tenancy being re- 
garded merely as a transitional state from that of farm laborer 
to that of farm-owner. The rapid rise in the price of land, 
however, has greatly increased the difficulty of the final stage 
of the transition. Prior to 1890, in almost any part of our 
best farming area a month's wages of a farm hand was equal to 
the price of an acre of good land. At the present time (1921), 
in spite of a considerable rise of farm wages it will take at least 
four and in many cases eight months' wages to buy the same acre. 

Increasing difficulty of financing the farmer. For the young 
and landless farmer this combination of expensive equipment 
and high-priced land has presented a more and more serious 
problem in recent years. Unless he has been able to get the per- 
sonal backing of some individual with capital to spare, he has 
had a slim chance of success. Various methods have been re- 
sorted to. Manufacturers and sellers of agricultural machinery 
and fertilizers have developed an elaborate credit system. In 
many cases the manufacturer has sold to the country dealer on 
credit and he, in turn, has sold to the farmer on credit. Such 
credit, however, has usually been for a relatively short time; 
that is, for the growing-season. A multitude of small country 
banks have sprung up, mainly since 1900, to help in the financ- 
ing of such farm operations as can be completed within a 
growing-season, or a year at the outside. A characteristic 
operation of this kind is found where a bank lends a corn 
farmer money with which to buy cattle from the Western 
ranges, which cattle the farmer fattens with his own corn crop 
and then sells to one of the great slaughtering establishments, 
paying off his loan with a part of the proceeds. 

Long-time credit. The greatest difficulty, however, has been 
presented by the farmers' need for long-time credit. When a 



BANKLNG 41 1 

tenant farmer wishes to buy a farm of his own or when a 
landowning farmer wishes to make permanent and expensive 
improvements, if he needs to borrow at all, it will usually take 
a period of years to repay the loan. The only satisfactory 
security he can offer for such long-time loans is a mortgage on 
the farm. But the market for farm mortgages has been a 
limited one. In other words, comparatively few persons are 
willing to accept a mortgage as security for money loaned. The 
reasons are rather obvious. One must be a good judge of farm 
values and must also understand the legal questions connected 
with mortgages and their foreclosure ; otherwise it is not safe for 
one to lend on mortgage security. These reasons are especially 
strong in a new community where there are no local lenders 
and where loanable money must be secured from a great dis- 
tance. The distant lenders are not in a position to know much 
about farm values, and if they live in other states they may not 
know much about the local statutes governing mortgages. Such 
communities have for these reasons always had difficulty in 
getting loans on favorable terms. 

Private agencies for financing the farm. This difficulty had 
been partially, but only partially, overcome in various ways. 
A local agency, either individual or corporate, knowing local 
farm values and other conditions would accept mortgages and 
add its own guaranty to increase their marketability and then 
sell them to distant investors. Again, certain large Eastern 
concerns, such as insurance companies, would send their own 
experts to selected regions to inspect farms and place loans 
secured by farm mortgages. 

Again, a number of large corporations, commonly called 
mortgage banks, were organized to lend on farm mortgages 
and to sell bonds to the investing public. Such a corporation, 
having '^ bought" a number of mortgage notes aggregating, let 
us say, Sioo,ooo, would deposit them with a trustee as security 
for its own bonds to the amount of $100,000. These bonds 
would then be sold to the general public. The investor had the 
advantage of buying a security resting on the entire assets of 



412 PRINCIPLES OF NATIONAL ECONOMY 

the corporation, including the mortgage notes. He did not have 
to know the value of any individual farm. The corporation 
itself assumed the responsibility of properly appraising the 
property against which it held mortgages. 

Federal Farm Loan system. In order to extend this principle 
and enable it to meet the need for mortgage credit in every 
part of the country, the Federal Farm Loan Act of 191 6 was 
passed. Under this act there was created a Federal Farm Loan 
Board to consist of the Secretary of the Treasury and four 
others to be appointed by the president, and to have general ad- 
ministrative control of the system. Under this board there were 
created twelve Farm Land Banks, located in twelve different 
districts into which the country was divided, each bank to be 
the center of the Farm Loan system for its own district. In 
each district, under its Farm Land Bank, there were to be 
organized an indefinite number of Farm Loan Associations, to 
be composed wholly of farmers who desire to borrow money on 
mortgage. A Farm Loan Association borrows money from the 
Farm Land Bank of its district. 

The following diagram will illustrate the general framework 
of the organization : 



Federal Farm Loan Board 

(made up of the Secretary of the 

Treasury and four others) 




1 






Farm Land Bank 
(of which there are twelve) 






1 






Farm Loan Association 
(an indefinite number) 






1 






Individual Farmer 
(an indefinite number) 





BANKING 413 

The twelve Federal Farm Land Banks are located in the 
following cities: Springfield, Mass.; Baltimore, Md.; Colum- 
bia, S. C; Louisville, Ky.; New Orleans, La.; St. Louis, Mo.; 
St. Paul, Minn.; Omaha, Nebr.; Wichita, Kans.; Houston, 
Tex.; Berkeley, Calif.; Spokane, Wash. 

There was also a provision in the Federal Farm Loan Act 
permitting joint-stock mortgage banks, such as were described 
in a previous paragraph, to come in under the Federal Farm 
Loan system by submitting to its general rules and regulations. 
A large number of such mortgage banks have taken advantage 
of this provision, there being twenty-five on February 15, 192 1, 
with capital stock of $7,966,000, with bond issues aggregat- 
ing something over $76,000,000, and with loans to farmers 
aggregating almost $78,000,000. 

On December 31, 1920, the total capital stock of the twelve 
Farm Land Banks amounted to $24,591,515, held as follows: 
by the United States government, $6,832,680; by National 
Farm Loan Associations, $17,663,725; by borrowers through 
agents, $79,230; by individual subscribers, $15,880. 

Total amounts loaned by the twelve Federal Land Banks up 
to November 30, 1920, were as follows: 

Springfield $13, 550,345 

Baltimore . . . , 14,732,783 

Columbia 20,406,515 

Louisville 27,691,200 

New Orleans 25,811,705 

St. Louis 30,951,675 

St. Paul 49,554,700 

Omaha 48,905,890 

Wichita 31,531,300 

Houston • 40,754,766 

Berkeley 18,645,900 

Spokane 46,084,535 

Total $368,621,314 

In order to assure a sufficient amount of capital stock it 
was provided thai in case the total $750,000 of capital stock 



414 PRINCIPLES OF NATIONAL ECONOMY 

of any Federal Farm Land Bank should not have been sub- 
scribed within thirty days after the opening of the books, it 
should become the duty of the Secretary of the Treasury "to 
subscribe the balance thereof on behalf of the United States." 
Still further to assure the Farm Land Banks a working capi- 
tal, in case the public should be slow to invest in the Farm 
Land Bonds, amendments were passed (January i8, 191 8, and 
May 26, 1920) authorizing the Secretary of the Treasury to 
purchase $200,000,000 of such bonds during, the years 191 8, 
1 91 9, 1920, and 192 1. On December 31, 1920, the United 
States government held $6,832,680 of the capital stock of the 
Farm Land Banks. On the same date the Treasury held their 
bonds to the amount of $182,235,000. The total amount of the 
bonds authorized and issued by them was $333,7,84,500. 

Under the operation of this act and its amendments such 
moneys as are secured from the sale of bonds, either to the 
Secretary of the Treasury or to the investing public, are loaned 
by the Farm Land Bank to Farm Loan Associations within 
its district in return for mortgages given by individual farmers 
to these Farm Loan Associations. The course of the money is, 
therefore, as follows : first, from the investor to the Farm Land 
Bank in exchange for bonds; second, from the Farm Land 
Bank to the Farm Loan Association in exchange for a batch of 
mortgages ; third, from the Farm Loan Association to the in- 
dividual farmer in exchange for an individual mortgage. The 
securities, however, proceed in the opposite direction : first, a 
mortgage is given by the individual farmer to his local Farm 
Loan Association in exchange for money ; second, this and other 
similar mortgages are transferred from the Farm Loan Asso- 
ciation to the Farm Land -Bank in exchange for money ; 
third, the Farm Land Bank deposits these mortgages under 
the direction of the Federal Farm Loan Board and, on the 
basis of these as security, issues its own bonds and sells them 
to the investors for money. 

Exemption of Farm Land Bonds from taxation. It was pro- 
vided in the Farm Loan Act that the bonds of the Farm Land 



BANKING 415 

Banks were to be exempt from taxation. The purpose of this 
exemption was to make such bonds so attractive to the general 
investor as to compensate for a low rate of interest. This low 
rate of interest on the bonds would then enable the Farm Land 
Banks to accept farm mortgage notes, paying a low rate of in- 
terest, and thus the farmer would be able to borrow his money 
at a lower rate than would be necessary if the Farm Land Bonds 
were subject to taxation. Those issued prior to May i, 1920, 
paid 4^ per cent. Subsequent issues pay 5 per cent. 

This provision was bitterly attacked on the ground that it 
was class legislation, or discrimination in favor of farmers as 
against other classes. The matter was under litigation for 
many months, but finally, in February, 192 1, the Supreme Court 
decided in favor of the constitutionality of the act. Pending 
this decision, the Farm Land Banks had been unable to func- 
tion. The effect of this decision will undoubtedly be to release 
them and permit such a development as was anticipated by the 
framers of the plan. It is the belief of the supporters of the 
plan that the Farm Land Bonds provided for under this act will 
prove a popular form of investment and become, in fact, one of 
the leading securities on the investors' markets of the country. 



CHAPTER XXIX 
MARKETING 

One very important topic under the general subject of ex- 
change is that of marketing. This has to do with the actual 
process of finding buyers for that which has been produced, or, 
in more abstract terms, with the bridging of the gap which 
separates producer and consumer. 

Essentials of successful marketing. There are four essentials 
to the easy and successful marketing of any commodity. In 
the first place, it must be of good quality ; that is, of the quality 
which is desired by the buyers. In the second place, the prod- 
uct must be so graded or standardized that the buyer can pur- 
chase it without inspection. The buyer of a farm product, for 
example, who must inspect it in order to test its quality, must 
necessarily waste a great deal of time and energy in the process. 
Time and energy are expensive. In order to save his time and 
do a large business at the minimum labor cost, he must insist 
on buying such products as have been graded and standardized 
so that he can order by grade and without inspection. In the 
third place, the product must be in some way stamped or 
branded, and the stamp or brand must be safeguarded as care- 
fully as a banker would safeguard his signature or the govern- 
ment its seal. Any individual or association which permits 
inferior or ungraded products to go under its stamp or brand 
must eventually suffer loss, for the reputation of the stamp or 
brand will be destroyed, and buyers will thereafter place no 
confidence in it. In the fourth place, the public must be 
educated as to the meaning of the grades and standards and 
the stamps, brands, or trade-marks, in order that it may be 
aware of the desirability of buying without inspection and of 
the possibilities in that direction. 

416 



MARKETING 417 

Unless the producer himself will undertake to do these four 
things the consumer will never consent to buy any large pro- 
portion of the product directly. The consumer will insist on 
saving his time, even at the loss of some money in the way of 
higher prices. The producer will not be able to get the ad- 
vantage of these higher prices, and there will be a considerable 
spread between the price which the producer gets and that 
which the consumer pays. This spread will be absorbed by 
those middlemen who buy the ungraded, nondescript products 
directly from the producers, in a form in which the consumers 
do not generally want them, and then put these products into 
such forms as will satisfy the consumers. 

Special difficulties in marketing farm produce. The marketing 
of farm products is the least organized and probably the least 
efficient part of our whole marketing system. This is probably 
inherent in the very nature of agricultural production. From 
the standpoint of production the advantages appear to be very 
definitely on the side of the small producer. A small farmer, 
being able to produce more economically than the large farmer, 
continues to hold the field. But he is at a peculiar disadvantage 
in the marketing of his own products. Even if he were able to 
grade and standardize his products, the difficulty of educating 
the public to the meaning of his brand would be insuperable. 
He has so little to sell that the cost of advertising would eat up 
the profits. To put it in another way, the public would soon 
become bewildered if every one of the millions of farmers of 
this country tried to create a special market for his own 
individual products. 

From the standpoint of marketing, the bonanza farmer has 
a great advantage. In some cases (that is, in the production of 
certain agricultural specialties, such as fancy fruits and vege- 
tables, breeding-animals, and race horses) this advantage in 
marketing is so great as to more than balance the disadvantage 
in production. This is probably due to the nature of an agri- 
cultural specialty. The great staple crops, on which the world 
must in the main be fed, are not so difficult to market as are 



41 8 PRINCIPLES OF NATIONAL ECONOMY 

specialties. In the production of these great staple crops the 
advantage will remain probably on the side of those who can 
reduce the cost of production to the minimum rather than on the 
side of those who can market most effectively. But in the case 
of agricultural specialties, where marketing is more difficult, 
the advantage will remain probably on the side of those who 
can market effectively rather than on the side of those who can 
reduce the cost of production to the lowest point. The large 
producing unit can do its own grading and standardizing, can 
adopt its own trade-mark or brand, and can advertise more 
effectively than the small producing unit. This will probably 
keep the production of agricultural specialties in the hands 
of large producers, at least for some time to come. The 
only chance which the small farmer will have in the field of 
agricultural specialities will be secured through cooperation. 

Cooperative marketing. It will be observed that there is very 
little cooperative farming in this country or anywhere else. 
There is a great deal of cooperation among farmers, especially 
in European countries ; but this cooperation is really coopera- 
tive marketing. The farm as a productive unit is managed in- 
dependently and separately, but the products of a great many 
farms are marketed cooperatively. This gives the double ad- 
vantage of economic production in small units and efficient 
marketing in large units. On the whole, it looks like an ideal 
arrangement. 

The superior bargaining power of the trust. This distinction 
between production and marketing will throw light on certain 
problems in business organization outside of agriculture. The 
so-called trust is primarily a marketing organization rather than 
a producing organization. A large number of independent com- 
panies, operating independent factories, join together for a 
common management. This may result in some reorganization 
of the work of production, but in the main it works a reorgani- 
zation in the methods of selling the product, of buying the raw 
materials, of hiring labor, or of bargaining for transportation. 
It is probable that some economies are introduced into produc- 



MARKETING 419 

tion, but even if no economies of production were secured, the 
trust might succeed by reason of its superior bargaining power. 
If by reason of its magnitude and the perfection of its organiza- 
tion it can bargain for better transportation rates than independ- 
ent producers can get, it may defeat them through competition. 
In the earher days of the trust movement this was an important 
factor in its success. Again, if the trust can get control of a 
source of raw material or, through its organization, can bargain 
more effectively for its raw materials, it likewise has an ad- 
vantage over its independent competitors. Or if it can secure 
its labor on better terms it will have another advantage. In 
the main, however, its chief advantage lies in its superior 
facilities in marketing. Having its selling organization highly 
perfected and its agents everywhere, it can profit by every 
possible fluctuation in demand and thus secure a legitimate 
advantage. Unfortunately it is able also to manipulate the 
market, to discriminate in prices between localities as well as 
between persons, and thus to gain an illegitimate advantage 
over its independent rivals. The advantages of the huge de- 
partment store are likewise in the field of bargaining rather than 
in the field of productive service. 

Social advantages of a good marketing system. There is lit- 
tle danger that any farmers' association will ever reach a mag- 
nitude or a perfection of organization which will permit it to 
discriminate in prices against certain localities or individuals. 
There is, therefore, little danger that it will ever be able to 
secure an illegitimate advantage. It may, however, reach a 
magnitude and a perfection of organization which will enable 
it to take advantage of whatever fluctuations the market shows 
and thus gain a legitimate profit. If, for example, in an un- 
organized market too much of a certain kind of produce shoyld 
be sent to one city, some of it would either go to waste or be 
very ineffectively consumed ; that is, be used for unimportant 
purposes. If at the same time too little were sent to another 
locality, there its marginal utility would be high. The total 
supply of the commodity would yield more satisfaction if it 



42 PRINCIPLES OF NATIONAL ECONOMY 

were redistributed. A community which was oversuppHed 
would lose very little by having its supply slightly reduced; 
whereas a community which was undersupplied would gain con- 
siderably by having its supply slightly increased. There would 
thus be a net gain to society through the redistribution. A large 
and efficient selling organization can frequently prevent such a 
bad geographical distribution of produce and thus avoid loss 
to the community. In so far as it achieves this result, it is 
rendering a valuable service to the nation and is entitled to 
profit by it. 

Standardization a government function. There may be some 
questions as to what part the government can properly take in 
the improvement of marketing methods and facilities. What- 
ever differences of opinion may exist with respect to other 
functions of government, little is said or can be said against 
coining money and fixing the standards of weights and meas- 
ures. Though these two functions are grouped together in the 
same clause of our Federal Constitution, it is doubtful whether 
it is generally realized how close is the logical connection be- 
tween them. Both result in great economy of effort in the 
transfer of goods. The economy involved in transferring coined 
money rather than uncoined metal is apparent. Coining the 
metal merely enables it to pass from hand to hand without the 
labor of inspection ; that is, without weighing it to determine its 
quantity and without testing it to determine its quality. It 
sells (if we may speak of selling money) on grade and reputa- 
tion rather than on inspection. It is the most salable of all 
commodities, and the fact that it is so standardized as to make 
inspection unnecessary on the part of the buyer has a great 
deal to do with giving it its superior salability. By the same 
process of standardization any other commodity may approach 
gold coin in salability, though it may not quite reach it. At 
least it is safe to say that whenever it can be sold entirely on 
grade and reputation and absolutely without inspection its 
salability will be enormously increased. 



MARKETING 421 

Standards for measuring quantity. A short step is taken in 
the direction of standardizing other commodities when the state 
establishes uniform standards for determining quantity; that 
is, when it fixes the standard of weights and measures. With- 
out some uniform system even our present methods of selHng 
would be much more clumsy and wasteful. Every buyer would 
have to have his own system for determining the quantity 
of his purchases. This falls short, however, in two important 
particulars of what is accomplished when metal is coined in a 
modern mint. In the first place, the government actually coins 
the money or requires it to be coined according to its own rules, 
whereas in other cases it only defines the units of measure- 
ment and commands conformity to its definitions. In the sec- 
ond place, coins are standardized not only as to quantity but 
as to quality as well. There is no probability that any govern- 
ment will be called upon to do that which would be analogous 
to coining money, — actually put up other commodities in 
standardized packages. Something is to be said in favor of 
fixing standards of quality as well as standards of quantity. 

Need for standards for determining quality. The reasons for 
fixing standards of quality, wherever it can be done, are identi- 
cal with those for fixing standards of measuring quantity. They 
are all summed up in the superior economy of buying on grade 
and reputation as compared with buying on inspection. The 
buyer of an unstandardized commodity may have enough con- 
fidence in the seller's system of weights and measures to avoid 
the necessity of weighing and measuring for himself, but he 
can scarcely avoid the necessity of inspecting the commodity 
in order to determine its quality. In some cases the determina- 
tion of its quality is easier than that of its quantity, but in other 
cases it is not. In all cases where quality can be standardized, 
there is economy of effort. So far as buyers can be saved the 
trouble of inspection, so far will they be enabled to economize 
the time and effort involved in making purchases and so far 
also will the salability of commodities be increased. Whether 



42 2 PRINCIPLES OF NATIONAL ECONOMY 

this will reduce the cost of getting the standardized commodi- 
ties from producers to consumers, or merely enable the con- 
sumers to use their time more advantageously to themselves, 
may be open to question, but the ultimate economic effects are 
much the same in the two cases. 

Need of expertness in buying supplies. Not the least among 
the advantages of a minute division of labor is the fact that 
each individual can avoid the necessity of being expert in many 
things and therefore has time to become a specialist in one 
thing. One of the advantages of the standardization of com- 
modities is that the average consumer can avoid the necessity 
of being an expert judge of the many articles which he has to 
purchase. He may therefore utilize his time and mental energy 
in his own special field of work. There is, to be sure, some- 
thing attractive in the custom of the well-to-do burgher's going 
to market and selecting with the eye of a connoisseur the 
various articles needed by his household, but it is wasteful of 
time and mental energy. When he or his housekeeper is able 
to order by telephone, without any inspection whatever, and 
still get what he wants, more time is left for other things. 

This will help to explain two very distinct tendencies in 
present-day retail-marketing methods. The first is to put up 
more and more articles in standardized packages. The second 
is to place more and more dependence upon the retailer, who, 
in many cases, is coming to regard his customers as clients to 
whom he is bound to give his own expert service. Both ten- 
dencies are designed to save the consumer the trouble of be- 
coming an expert buyer and to leave him more time for other 
things. Neither tendency has as yet reduced the cost of getting 
products from producer to consumer. If the consumer utilizes 
the time saved in marketing by doing work which earns him a 
larger income with which to purchase goods, it perhaps does 
him as much good as it would if these tendencies merely 
reduced the price of commodities. 

Marketing by telephone an American habit. Marketing by 
telephone is peculiarly an American habit. This may in part 



MARKETING 423 

explain and in part be explained by the fact that two thirds of 
all the telephones in the world are in the United States and 
three fourths of them are in the United States and Canada. 
This habit makes it more and more difficult for the householder 
to inspect her purchases. She is, therefore, more and more 
driven to one of the alternatives mentioned before. She must 
order well-known brands, which are put up in standardized 
packages, trade-marked, and sold on grade or reputation, or 
else she must rely on her grocer or her marketman very much 
as she does on her physician, her lawyer, or her financial ad- 
viser. The quality of dependableness becomes, therefore, more 
and more important in the grocer and the marketman. Such 
qualities have to be paid for. Thus the householder saves time, 
but pays for the privilege. 

If she buys standardized goods in standardized packages she 
will usually pay from 50 to 100 per cent more than she would 
if she bought in bulk and did her own inspecting and selecting. 
If she relies, as a client, upon the honesty and expertness of 
her grocer and her marketman she must pay for that. Honest 
and capable experts do not have to live on small incomes any- 
where, and when they go into the business of selling produce 
they will charge for their services. 

Standardization , should take place early in the marketing 
process. One reason why these tendencies merely save the time 
of the consumer instead of reducing the cost of getting the 
products to him is that the standardization takes place only in 
the last stage of the process; that is, just before the com- 
modities reach the consumer. In order to reduce materially 
the spread between the price which the producer gets and that 
which the consumer pays, standardization must take place early 
in the process. This will enable the standardized article to go 
through the channels of trade at a lower cost. If it has to be 
inspected every time it changes hands the process is expensive 
and someone must pay the cost. Some products apparently 
cannot be standardized, so there must always be a wide spread 
between the producers' and the consumers' prices. 



424 PRINCIPLES OF NATIONAL ECONOMY 

A good illustration of the effect of standardizing a product 
early in the process of getting it from the producer to the 
consumer is found in the marketing of certain kinds of Western 
fruit. They are graded and standardized as soon as they leave 
the orchards. All subsequent inspection is therefore unneces- 
sary and the cost of getting them to the consumer is reduced 
practically to the physical cost of haulage and handling. This 
has notably reduced the spread between the two prices. Many 
other commodities, such as wheat, cotton, pig iron, and coal, 
are sold largely on grade rather than on inspection. In these 
cases the government has had very little to do with the stand- 
ardization. Two recent acts of Congress, however, have brought 
the government definitely into this field as the fixer of stand- 
ards of quality. These are the Cotton Futures Act and the 
Grain Standards Act. Both give the Secretary of Agriculture 
power to establish grades and to enforce their use in the regular 
channels of trade. A number of states have also passed grad- 
ing laws of various kinds. Four New England states have 
passed a uniform apple-grading law, defining the contents 
of a standard barrel, describing the various grades of ap- 
ples, and imposing penalties upon all departures from the 
standard prescribed. 

Such legislative acts cannot be called in any true sense inter- 
ferences with trade. They are designed to increase the freedom 
with which commodities may circulate. They are somewhat 
analogous to the work of the traffic policeman on a crowded 
corner. He may exercise authority and interfere occasionally 
with an individual's movement, but the result of his so-called 
interference is greater freedom of traffic.^ 

Brands and trade-marks. Brands, trade-marks, and other 
selling devices of this general description would be useless or 
impossible without some kind of standardization in production 
or grading of products. Where these services are properly used, 
they are an aid to the buyer as well as to the seller. They 

1 Compare the article by the author, on " Standardization in Marketing," in 
the Quarterly Journal of Economics, Vol. XXXI, No. 2, pp. 341-344. 



MARKETING 425 

help him to know what he is getting and enable even the 
inexpert buyer to buy safely. 

Advertising and salesmanship. From the point of view of the 
seller of any commodity there is not much doubt as to the 
efficacy of advertising and expert salesmanship. Serious doubts 
have been expressed, however, as to the social advantage of what 
may be called high-pressure selling. Why, we are asked, should 
we be subjected to all the arts of the expert salesman and 
advertiser, who are doing their utmost to persuade us to spend 
our money for things which we do not need? On the other 
hand, it is replied, why should not every art of persuasion 
known to the expert be brought to bear upon men to lead them 
to do what they ought to do ? This is what evangelism, moral 
leadership, and all sound instruction amounts to. If we are to 
allow freedom in the exercise of the arts of persuasion at all, 
it will be difficult to draw the line. Who shall act as our censor 
and permit one man and forbid another to persuade people to 
do what he wants them to do ? 

Except in extreme cases this argument is unanswerable. In 
the case of immoral acts, or any act which the moral sense of 
the community condemns, it is obviously as immoral to per- 
suade people to commit those acts as it is to commit them. If 
there is anything which men clearly ought not to buy, it is 
equally clear that men ought not to advertise it or try to sell it. 
But the difficulty, except in extreme cases, is to decide just 
what things it is proper, and what it is improper, to buy. 

It is quite clear, however, aside from all questions of legal 
conduct, that much of our advertising is a waste of human 
energy. Sometimes it is a service to a consumer to apprise him 
of the fact that he can buy something which he has long wanted 
and to tell him where it can be had. In most cases, however, 
advertising serves no such purpose. One does not need an 
advertisement to apprise him of the fact that soap can be 
purchased. The only purpose served, in all such cases, is to per- 
suade people to buy one brand rather than another. Our help- 
lessness in such a situation is revealed to us when we consider 



42 6 PRINCIPLES OF NATIONAL ECONOMY 

that it would take a great deal of campaigning, accompanied by 
advertising and high-pressure persuasion, to work up a public 
sentiment hostile to advertising. We might easily waste more 
energy in this campaign than is now wasted in advertising. 

Political campaigning. Socialists are in the habit of pointing 
to the wastefulness of advertising as one of the costs of com- 
petition. They do not point out, however, that a political cam- 
paign is just as wasteful as a selling campaign. The candidate 
for office advertises his candidacy and uses high-pressure per- 
suasion to get people to vote for him. Since the extension of 
government power and authority would multiply government 
offices, it would necessarily multiply the number of campaigners 
and greatly increase the waste of time and energy used up 
in political campaigns. Every campaigner, even he who is 
campaigning for socialism, is doing much the same kind of 
work as is done by the expert advertiser. He is using high- 
pressure persuasion to get men to do things which they would 
otherwise not do. 

It looks as though we should have to regard persuasion in 
all its aspects, except persuasion to do that which is morally 
condemned, as a necessary cost of freedom. A despot could 
suppress all persuasion, in politics as well as in salesmanship, 
but a free people can scarcely get along without it. Freedom is 
in some respects costly, but it is worth all it costs. 



CHAPTER XXX 

ECONOMIC CRISES 

Financial crises. One of the most important and most puz- 
zling of all modern economic questions is that of the frequent 
recurrence of financial crises and general industrial depressions. 
A financial crisis is an occasion when the money market be- 
comes suddenly demoralized, confidence disappears, and credit 
shrinks. Everyone to whom money is owed wants it at once, 
but no one wants to let go of any money in his posses- 
sion for fear that he may not be able to get any more. Be- 
sides, there does not seem to be money enough to pay off 
existing debts. 

In the chapter on Banking it was pointed out that a large 
part of the business of the world is done on credit, without 
the actual handling of money. If you will imagine a group of 
men doing business with one another, where each one trusts 
every other, you will see that a large amount can be done 
with a ridiculously small amount of money. Many transactions 
will be carried on by means of promises to pay money in- 
stead of with the money itself. Many of these promises will 
be balanced against one another and canceled without the use 
of any money. In other cases the money will be used merely 
to pay the balances. But if something should happen to destroy 
their confidence either in one another or in the continuance 
of prosperity, the maintenance of price levels, the productivity 
of labor, or anything else upon which business depends, so that 
no one would accept promises, but everyone demanded real 
money, there might not be money enough to go around and 
make the necessary payments. In that case business would have 
to slow down, and only as much business could be done as could 
be transacted with the small amount of money available. If in 

427 



428 PRINCIPLES OF NATIONAL ECONOMY 

addition to this everyone held on to all the money he could 
lay hands on^ for fear that he might not be able to get any more, 
even the limited amount of money in circulation would move 
slowly, and business would have to slow down correspondingly. 
A swift dollar may pass from hand to hand many times in a day 
and in this case do a large amount of business, but a slow dollar 
passes from hand to hand only a few times a day and does a 
small amount of business. 

Industrial depressions. An industrial depression is usually 
more deep-seated than a financial crisis and usually lasts for a 
longer time. It is a general stagnation of production because 
of inability to get satisfactory prices for products. Various 
explanations, some intelligent and some absurd, have been 
offered. Overproduction is one of the most common anjd least 
intelligent. There may be such a thing as disproportionate pro- 
duction, but such a thing as general overproduction is a physical 
impossibility. The production and supplying of one thing is a 
demand for something else — the more production^ the more 
demand ; but if some things are produced and offered for sale, 
and there is no demand for them, it means either that those few 
things are overproduced or that the other things which might be 
exchanged for them are underproduced. 

The overproduction theory. One phase of the overproduc- 
tion theory of industrial depression is that wages are so low 
that the laborer is not able to buy his own products. It is 
argued that this results in an overproduction and a glut on the 
market. There are many excellent reasons why wages should 
be higher than they are^ but this is not one of them. So far as 
its effect on the general purchasing power of the community is 
concerned, it makes no difference whether wages are high and 
rent, interest, and profits are low or whether wages are low and 
rent, interest, and profits are high. If the laborer gets a small 
share of the production of a given industry, and the managers, 
landowners, and capitalists get a large share, these have a 
large purchasing power and the laborer a small purchasing 
power. The value of the whole product of every industry 



ECONOMIC CRISES 



429 



goes to these various classes, and they have it all to spend. If 
one class possesses a large share, and another class a small 
share, the total amount to be spent for other commodities is 
not affected by that distribution. If the laborers get absolutely 
the whole product of an industry, there would be no more to 
spend on other products than if the laborers got one half the 
product and the other participants got the other half. This, 
let is be repeated, has nothing to do with other and excellent 
reasons why wages should be high. 

The periodicity theory. A certain periodicity has been ob- 
served in the recurrence of crises and depressions. It is not 
always easy to determine just the interval that elapses between 
depressions. Sometimes they come approximately twenty 
years apart, but they have a disconcerting habit of coming at 
unexpected times. In his book on ''Economic Crises" Jones 
gives the following table :^ 



LIST OF ECONOMIC CRISES 



United 




France 


United 


England 


France 


States 






States 









1792-1793 


— 


1847 


1847 


1847 


— 


1796 


— 


— 


— 


1855 


— 


— 


1804 


1857 


1857 


1857 


— 


i8io-i8'ii 


— 


— 


1866 


— 


1812 


— 


— 


1869 


— 


— 


— 


— 


1813 


1873 


1873 


1873 


— 


1S15 


— 


— 


— 


1882 


1818 


— 


1818 


1884 


— 


1884-1885 


1825 


1825 


1825 


1890 


1890 


1890 


— 


— 


1830 


1893 


— 


1893 


1837-1839 


1S36-1839 


1836-1839 









In the nineteenth century it will be noticed that there were 
severe crises in 181 8, 1837, 1857, with lesser crises in 1825 
and 1847. The severe crises seemed to come every twenty 
years for almost half a century. Again, there were severe crises 

1 Edward D. Jones, Economic Crises. The Macmillan Company, New York, 
1900. 



430 PRINCIPLES OF NATIONAL ECONOMY 

in 1873 and 1893^ with a less severe one in 1884. Another one 
occurred in 1907. 

Various attempts have been made to explain this apparent 
periodicity. The late William Stanley Jevons developed an in- 
teresting theory of the coordination between sun-spot cycles 
and industrial depressions. The sun-spot cycles, he argued, 
have a profound effect on the weather, rainfall, etc., and these 
in turn affect the agricultural basis of the world's wealth. 
This theory, however, had not been taken seriously by the econ- 
omists until it was recently revived by the interesting observa- 
tions of Professor Ellsworth Huntington. It is true he has not 
developed the theory at great length as applied to economic 
crises ; but he had presented strong evidence in favor of the 
doctrine that solar disturbances profoundly affect climatic con- 
ditions and rainfall, and that these in turn have produced great 
historical and economic disturbances.^ 

Meanwhile the question Why do we have business depres- 
sions? remains unanswered^ and it is now being asked with a 
new insistence. It is about as hard to answer as the question 
Why is there sickness ? There are, however, a few things that 
may be said about depressions that may help to an under- 
standing. In the first place, they are associated with free buy- 
ing and selling ; in the second place, they are associated with 
the free use of credit; in the third place, they are associated 
with speculation. 

If all buying and selling were prohibited and industry were 
carried on like a military campaign, everybody working under 
orders and receiving his rations and other supplies from mili- 
tary stores, there would be no industrial depressions of the kind 
we now know, though there would certainly be worse things. 
If we decide to retain the system of free buying and selling 
we shall always run the risk of unevenness or irregularity in 
the rate of buying. If people buy at irregular rates, there must 

1 Ellsworth Huntington, "Climatic Changes and Agricultural Exhaustion as 
Elements in the Fall of Rome," Quarterly Journal of Economics, February, 191 7. 
See also "The Pulse of Asia," Houghton Mifflin Company, Boston, 1907. 



ECONOMIC CRISES 431 

of necessity be irregularity in the business of merchandising 
and producing. Fads and fashions alone introduce elements of 
uncertainty and irregularity into the buying of goods. Be- 
sides, there are times when people spend their money more 
freely than at other times. This free buying at one time and 
slow buying at another adds a further element of uncertainty 
and irregularity and makes it certain that business will be more 
active at one time than at another. 

If no buying were ever done on credit, there would still 
be some irregularities in buying, but they would be much less 
frequent and less extreme than when credit is largely used. 
People might spend their money at one time as fast as they 
could and at another hold on to it a little longer, yet so 
long as they are spending real money and paying cash for 
what they get, these irregularities will not be so very great. 
But when men suddenly find that their credit is good and 
they begin buying increasing quantities on credit, they are, 
for a time, spending money faster than they get it or, more 
accurately, buying goods faster than they can pay for them 
or faster than their individual incomes will warrant. This 
accelerated buying makes business abnormally active. If credit 
were not elastic, and men were making practically the same use 
of credit at one time as at another, buying would soon settle 
down to a normal rate. But a few failures will tend to de- 
stroy confidence. Men find that they cannot buy as much on 
credit, or they grow cautious and decide not to make use of 
their credit ; and this results in abnormally low buying. During 
this period even those whose normal incomes have not been 
reduced find that they must spend less than their total in- 
comes for new goods, being compelled to spend a part of this 
year's income in paying for goods that were bought last year. 
This means that they must of necessity spend less for this 
year's goods, whereas during the period of credit expansion 
they were buying more than their incomes would warrant. Dur- 
ing this period of credit contraction they cannot buy as many 
new goods as their incomes would warrant because they are 



432 PRINCIPLES OF NATIONAL ECONOMY 

still paying for old goods. This makes a vast difference in 
business activity. 

When not only consumers but merchants, manufacturers, 
farmers, and investors are buying on credit and expanding their 
credit, business expands at an astounding rate ; but when they 
all stop buying new commodities in order to pay for the old 
ones, there is no demand for new stuff and business slows down 
at an equally astounding rate. 

As to speculation, when prices are tending upward and it is 
the belief that this tendency will continue, everyone is tempted 
to speculate, at least in an apparently mild and harmless way. 
If there is something that we shall need later on and the 
price is likely to go higher, now is the time to buy. When we 
act on this impulse we accelerate our rate of buying, for a time 
at least, and this tends to send prices still higher, this, in turn, 
tempting us to still more speculation. When, however, we get 
stocked up, buying comes back at least to normal. When 
prices start downward, as they are likely to, the opposite tend- 
ency shows itself. If we think that prices are going to be lower 
we have a reason for postponing buying and for not only using 
up our old stocks but waiting as long as we can before re- 
newing. This results in an abnormal retardation in the buying 
of new goods. 

When, instead of this mild and harmless form of speculation, 
we have men buying large quantities of commodities for the sole 
purpose of selling again when the price rises, the irregularities 
of the market are still further exaggerated. When prices are 
going up every speculator wants to buy and no one wants to 
sell. This excess of buyers over sellers accelerates the rise in 
prices. When prices start downward every speculator is a 
seller and no one wants to buy. This, in turn, accelerates the 
fall in prices. 

We may be able to repress some of the wilder forms of specu- 
lation, but it is difficult to see how we can prevent those who 
need goods from buying when the price suits them. We may 
be able to restrict somewhat the overexpansion of credit, but 



ECONOMIC CRISES 433 

it is difficult to see how men can be prevented from buying some 
things on credit, provided they can find others who will trust 
them. Finally, it may be possible to restrict somewhat the field 
of free buying and selling and to enlarge that of authority and 
obedience, but it is difficult to see how all buying and selling 
can be prevented. We may, in other words, find ways of 
decreasing the violence and frequency of business depressions, 
but we cannot eliminate all irregularities of demand among free 
buyers and sellers. These irregularities of demand with the 
resulting irregularities in business activity are ar^ong the 
penalties we shall have to pay for the privilege of buying what 
we like and when we like it. 

There come times, however, when, for reasons but vaguely 
understood, a veritable fever of speculation takes possession of 
a community. When this happens the prices paid for the arti- 
cles in which people are speculating do not bear any logical 
relation to the real values. The speculator will pay any price 
for anything, provided he thinks he can sell it later at a still 
higher price. When prices are tending rapidly upward he may 
rely on the mere momentum to carry them higher. There is 
only one possible outcome of this tendency — a rapid fall in the 
prices of the commodities in which men are speculating. 

Even though the speculation take place in a single article, it 
may produce a profound economic disturbance. The money 
that is absorbed in the speculative purchasing of the article in 
question is necessarily withdrawn from other kinds of business. 
This in itself produces some disturbance. When a fall in prices 
begins, a general bankruptcy among the speculators takes place. 
When a number of men become bankrupt and are unable to pay 
their obligations, a process begins which may be compared to 
knocking over one brick in a row of bricks standing close 
together. The falling of one brick knocks over the one next to 
it, and so on until the whole row falls. Accordingly, if one indi- 
vidual who owes money to another fails to pay his debt, the 
latter, not being able to collect his money, fails to pay his obli- 
gations to a third, and so on ; one after another fails, and the 



434 PRINCIPLES OF NATIONAL ECONOMY 

bankruptcy spreads throughout the community in a sort of 
wave motion. A depression always follows a speculative mania 
of any kind, whether it be a real-estate boom or a boom in Short- 
horn cattle, Belgian hares, or French bulldogs. This has led to 
the sage remark that ''the echo of a departed boom is the 
saddest sound in nature." 

The real-estate boom. The wave of speculation in land which 
is known as a real-estate boom is one of the most interesting and 
instructive of all subjects of economic study. No one has ever 
been able to explain just how it starts, but after it has started, 
it is not so difficult to understand. Something happens, let us 
say, such as the building of a new railroad, the opening of a 
new mine, or the location of a new factory, to produce a very 
rapid rise in the price of city lots. Men double and quadruple 
their money in a short time by merely buying and selling again 
at a higher price. This sets them and others crazy. Everyone 
wants to buy lots for the purpose of selling again. The first 
effect is to increase greatly the number of buyers, and the effect 
of this is to send the prices still higher. These buyers, as a 
consequence, also make money rapidly. This attracts still other 
buyers, some of them coming from long distances to share in 
the harvest. So long as buyers are increasing faster than sellers, 
prices continue to go up; but when the buyers become less 
numerous than the sellers, which must inevitably happen, prices 
begin to fall. Suddenly everyone becomes a seller, and there 
are no buyers at all. Stagnation, depression, bankruptcy, and 
general ruin ensue. 

The recovery is very slow. The men who are left with land 
on their hands are not fitted to use it. They did not want it for 
use ; they wanted it only to sell. This means an inefficient use 
of the land. Besides, even those owners who are fitted to put 
the land to an economic use are handicapped because they put 
too much money into the land and have too little with which to 
develop or use it. Those who were lucky enough to sell out in 
good time are very careful not to let go of their money or to 



ECONOMIC CRISES 435 

invest it in productive industry. Years usually elapse before 
the city recovers from the disaster. 

Speculation in farm land, in railroads, in mining, as well as in 
Belgian hares, tulips, and Shorthorn cattle, has produced a 
number of historic depressions of this kind. 

The overinvestment theory. There are, however, even more 
fundamental and far-reaching reasons than these for a certain 
tendency to overinvestment in certain special lines of industry. 
Overinvestment may produce very much the same results as 
overspeculation, though they are not likely to be so acute or so 
sudden in their appearance. 

Overinvestment in the railroads of the Far West is supposed 
to have had something to do with the panic of 1857. The money 
was spent, the railroads were built, and then it began to appear 
that it would be some years before there would be business 
enough to put the railroads on a paying basis. Meanwhile all 
that capital had been diverted from other industries, which 
suffered in consequence. In many cases, however, the shares 
of the new railroad enterprise had been bought on credit. As 
soon as it appeared that dividends were not speedily to be forth- 
coming, the value of the shares fell rapidly, and those who had 
invested on credit in many cases suffered bankruptcy. 

There is something also in the very nature of modern indus- 
try which seems to render it highly sensitive. The countries 
which show the largest amount of enterprise and the adventur- 
ing spirit not only expand most rapidly but also, at the same 
time, seem to have the largest number of industrial depressions. 
The tendency to rush headlong into new enterprises is doubtless 
an important factor in national expansion, but it also produces 
a severe reaction when this headlong spirit rushes too far in a 
given direction. 

One characteristic of a modern industrial community is the 
proportion which producers' goods hold to the total wealth. 
This means that a large part of the wealth is in forms which 
have no utility in themselves but which derive their utility from 



436 PRINCIPLES OF NATIONAL ECONOMY 

the goods which they help to produce. A satisfactory explana- 
tion of industrial depression must, in the opinion of the author, 
be sought in the laws of value which govern investment in 
this class of goods, rather than in the conditions of the money 
market or those of organized credit/ 

Violent fluctuations of the value of producers' goods on the 
investors' market. Let us begin by noticing a few elementary 
facts. Every farmer knows that a horse which will not earn 
more than his feed, or a piece of land which will not produce 
more than it costs to cultivate it, is of no value. Likewise every 
business man knows that an establishment that cannot be made 
to pay more than running expenses is worth nothing except as 
old iron. This is equivalent to saying that the value of such an 
establishment — or, indeed, of any productive agent — is deter- 
mined not by the total value of its product but by the excess of 
that total value over and above the running expenses. When the 
running expenses are high and the output is large, so that the 
earnings depend upon small profits and large sales, a very 
slight rise in the value of the product may double or more 
than double the value of the establishment, provided, of course, 
that the rise in value is believed to be permanent. Let us 
suppose that a certain shoe factory can be made to turn out 
100,000 pairs of shoes in a year at a uniform cost of $8 a pair. 
If these shoes cannot be sold at more than $8 a pair the plant is 
worthless, but if they can be sold at $8.25 a pair the earnings 
of the plant will be $25,000, which, capitalized at 5 per cent, 
will make it worth $500,000. If, however, the price of shoes 
should rise to $8.50 the earnings of the plant would be doubled, 
and if this rise in value were believed to be permanent the value 
of the plant would be doubled. Thus an increase of only one 
thirty-third in the value of the product would double the value 
of the plant. In the same way, a subsequent fall of one thirty- 
fourth in the value of the product would reduce the value 
of the plant by one half, while a fall of one seventeenth in the 

^See "A Suggestion for a Theory of Industrial Depression," Quarterly 
Journal of Economics (May, 1903), p. 497. 



ECONOMIC CRISES 437 

value of the product would destroy the value of the plant 
altogether. This may be stated as a general law to the effect 
that a slight fluctuation in the value of a product tends to pro- 
duce a violent fluctuation in the value of the establishment 
producing it. Stated in still more general terms, the value of 
producers' goods tends to fluctuate more violently than the 
value of consumers' goods.* 

This law is capable of still further extension when we con- 
sider that producers' goods are themselves produced by other 
productive agents. The different parts of the shoe factory of 
the above illustration were produced in other factories, and the 
fluctuations in the value of the shoe factory would tend to pro- 
duce still more violent fluctuations in the values of the establish- 
ments producing the different parts, for the same reasons as 
were given above. The law might therefore be extended so as 
to read. The farther removed the producers' goods are from 
some consumable product, the more violent the fluctuations in 
value tend to be. 

This would be the tendency until that stage was reached 
where the producers' agents were no longer especially connected 
with one particular line of production and were not, therefore, 
affected merely by changes in price of the one kind of consum- 
able product. 

It must be admitted that the fluctuations in the value of 
producers' goods were never actually so violent as the fore- 
going illustrations have supposed, mainly for the reason that 
not every rise or fall in the value of products is believed to be 
permanent. But where the high or low price of a product 
continues for some time it invariably leads to a belief that it 
is likely to continue, and this raises or depresses the price of the 
productive agent out of proportion to the rise or fall in the 
price of the product. 

In this connection it is well to observe that while the imme- 
diate demand for consumers' goods comes from consumers 
themselves, the immediate demand for producers' goods comes 
from investors. Since their willingness to invest depends not 



438 PRINCIPLES OF NATIONAL ECONOMY 

upon the value of the gross product of the productive agent 
but upon the excess of that gross product over and above the 
cost of using the agent, — which excess has been shown to 
fluctuate more violently than the total value, — the instability 
of the investors' market is therefore not altogether due to 
psychological changes on their part, but in a large degree to 
the objective causes which affect the value of the things in 
which they invest. 

A slight rise in the price of consumers' goods will so increase 
the value of the producers' goods which enter into their pro- 
duction as to lead to larger investment in producers' goods. 
The resulting large market for the latter, again, stimulates 
the production of such goods and withdraws productive energy 
from the creation of consumers' goods. This for the time 
tends to raise the price of consumers' goods still higher, and 
this, again, to stimulate still further the creation of producers' 
goods. There is no check to this tendency until the new 
stocks of producers' goods begin to pour upon the market an 
increased flow of consumers' goods. This tends to produce a 
fall in their value, which in turn produces a still greater fall 
in the value of producers' goods ; and so the process goes. 
There seems, therefore, to be a fundamental reason for the 
periodicity of industrial depression, which can be removed 
only by such a complete knowledge and understanding of the 
situation as would enable the business world to foresee the 
tendencies and take measures to overcome them. 

These observations regarding the law of value as applied 
to different classes of goods may throw some light on the rela- 
tive stability in the price of a consumable article, such as 
sugar, in comparison with the price of such an article as steel, 
which belongs chiefly to the class of producers' goods several 
steps removed from consumers' goods. The market for sugar 
is mainly a consumers' market, while the market for steel is 
mainly an investors' market. A consumers' market depends 
upon the willingness of the public to consume, while an inves- 
tors' market depends upon their willingness to invest. As was 



ECONOMIC CRISES 439 

• 
shown above, there are reasons, other than psychological, why 
an investors' market must be more unstable than a consumers' 
market. 

Even consumable commodities are sometimes affected by 
a speculative tendency ; in other words, consumers thernselves 
sometimes speculate a little in the goods which they buy 
for their own direct consumption. When prices are tending 
upward and it is expected that they will continue upward, there 
is a distinct tendency to accelerate buying. The consumer 
foresees that he must sooner or later buy sugar, shoes, clothes, 
coal, and furniture. Since he must buy them anyway, and the 
price is probably lower now than it will be later, he reasons 
that he might as well buy now. If he does not reach this 
conclusion by his own unaided reasoning, some dealer is usually 
willing to aid him by supplying arguments in favor of buying 
at once. When consumers generally begin thus to accelerate 
their buying it tends still further to stimulate the rise of prices. 
This, in turn, furnishes a still stronger reason for early buying 
before prices get any higher, etc. But acceleration cannot go 
on indefinitely. Sooner or later everybody is stocked up, 
and even though one continues to carry a full stock of all neces- 
sary supplies, his rate of buying becomes normal. The rate 
accelerates only while he is increasing his stocks. When he 
stops increasing them he stops increasing his purchases in the 
immediate present and therefore stops furnishing a further 
stimulus to a further rise of prices. 

On the other hand, when the upward tendency of prices has 
exhausted itself, and it begins to appear that prices are likely to 
fall, there is a distinct tendency to retard the buying even of 
necessaries. If prices are coming down everyone who can 
postpone the buying of anything has a good reason for so 
doing. Those who stocked up during the period of rising prices 
can now use up their stock and thus postpone further buyiiig. 
This, in turn, retards and reduces the effective demand in the 
immediate present. This tends still further to hasten the fall 
of prices and this, in turn, furnishes a still stronger reason for 



440 PRINCIPLES OF NATIONAL ECONOMY 

postponing buying as far as possible, etc. After a time all 
the old stocks are used up and, as there is no opportunity for 
further postponement, buying becomes normal again. It is for- 
tunate if the prices do not start violently upward again, thus 
starting another cycle. 

These two tendencies — to accelerate buying when prices 
are believed to be rising from a low to a high level and to 
retard buying when they are believed to be falling from a high 
to a low level — not only affect consumers but dealers as well. 
Altogether they help to account for those periods of feverish 
prosperity and chilly depression which are so noticeable in mod- 
ern times. They seem to be a necessary accompaniment of any 
system of free buying and selling. At least, no one has ever 
suggested a method of preventing their recurrence without 
stopping the processes of free buying and selling and sub- 
stituting some sort of rationing process under which produc- 
tion and distribution would be carried on under a system of 
authority and obedience rather than under the system of free 
bargaining. 

Let it not be too hastily assumed that there is no way of 
preventing these recurring business depressions. There is a 
remedy for every economic evil. The only question is whether 
we are willing to pay the cost of the remedy. In other words, 
the question is whether the evil to be remedied is great enough 
to justify the cost of the remedy. There are a great many 
things in the world that ought to be reformed, from spelling 
up to clothes, but most of them are not important enough to 
justify the trouble it would take to reform them. We must 
first decide whether these recurring cycles of trade with their 
business depressions are worth reforming. Nothing should be 
taken for granted without careful investigation. It is not 
impossible that more progress is made over long periods of 
time under these cycles of rapidly increasing business activ- 
ity, rising prices, and general prosperity, followed by decreas- 
ing business activity, falling prices, and general depression, 



ECONOMIC CRISES 441 

than we should have with constant business activity, stable 
prices, and uniform prosperity. 

Let us begin with one or two analogies, which, .of course, do 
not prove anything, though they may suggest possible conclu- 
sions. Probably every farmer in the temperate zone would say, 
if asked suddenly, that it would be a good thing if the cycle of 
the seasons could be eliminated so that we could have summer 
all the time. It doubtless seems unfortunate that there should 
be a winter season when no plants grow and when live stock 
have to be fed with stored-up hay and grain. And yet if he 
observes widely he will find that the greatest agricultural pros- 
perity and progress are seen in precisely those zones where the 
cycle of rapid plant growth followed by a dormant period is 
most marked. Not only do the forces of plant growth seem tp 
work with a new vigor after the winter's torpor but man him- 
self seems to take hold of the spring work with a zeal and 
enthusiasm that would be difficult to maintain the year round if 
there were no seasons. Again, when one is out in the woods, one 
is not usually worried lest a tree or a branch should fall on him, 
in spite of the fact that he sees all around him evidence that 
trees and branches have fallen. One reason is that all the trees 
and branches that were weak and ready to fall were blown down 
in the last storm. , Those which weathered that storm are not 
likely to fall until the next one. It is not impossible that a large 
part of what we call business confidence, on which so much of 
our business prosperity depends, is due to the fact that all the 
important business houses and financial institutions that were 
weak enough to fail were eliminated in the last depression. 
Those which weathered that crisis are not likely to fail now 
nor until they develop weakness or unsoundness, which will be 
tested by the next crisis. Meanwhile we have enough confi- 
dence in the general economic conditions to justify us in start- 
ing new enterprises. This tends to unusually active business 
and the development of many ri^w enterprises which, in turn, 
call for another testing period later on. This may so increase 



442 PRINCIPLES OF NATIONAL ECONOMY 

the effectiveness of the general process of trial and error, varia- 
tion and selection, wholesale experimentation and severe test- 
ing (which is the only method by which progress comes in any 
field), as to give us more progress in the long run than we should 
have if things ran along at a uniform rate. In short, until we 
are more certain than we can now possibly be that it is desirable 
to eliminate economic crises, we would probably do well not 
to dabble too much with remedies. Nevertheless remedies may 
be applied if we care to pay the cost of them. 

Periods of depression are assumed to impose special hard- 
ships on laborers. Yet it is an observed fact that wages rise 
during a period of special business activity and that it is very 
difficult to reduce them during periods of depression. Though 
there may be some reduction they seldom go back to the old 
level. The process of forcing wages up during periods of ex- 
pansion and holding them up during periods of contraction 
probably does more for labor in the long run than could be done 
if there were no periods of special expansion and contraction. 

In the chapter on The Purchasing Power of Money it was 
pointed out that prices could be stabilized by several methods. 
This would, in itself, go a long way toward stabilizing busi- 
ness. Few things so stimulate business activity as rising prices, 
though rising prices and abnormal business activity are gen- 
erally joint results of active buying. To prevent prices from 
rising would have a dampening effect on business expansion. 
Falling prices, on the contrary, discourage business activity. 
To prevent their falling would remove the discouragement. 
When prices rise because of abnormally active bujdng by 
consumers, the most effective way to prevent their rising is 
to retard buying ; when they fall because of slow buying by 
consumers, the most effective way to prevent their falling is to 
stimulate buying. 



CHAPTER XXXI 

FREE TRADE 

Advantages of exchange among individuals of the same 
country. Freedom of exchange between individuals is so 
clearly advantageous that practically no one advocates serious 
restrictions upon it. Freedom of trade between different sec- 
tions of the same country also is generally approved. It would 
seem absurd for the South, which is peculiarly adapted to cot- 
ton, to try to be entirely self-supporting and, especially, to 
produce certain things, such as wheat, for which its soil and 
climate are not so well suited as are those of other sections of 
the country. No one would seriously advocate an interference 
with the shipments of wheat and wheat flour to the South 
or of cotton to the North. 

Advantages of exchange among individuals of different coun- 
tries. It is argued by a large majority of the students of eco- 
nomics that the same arguments which favor a policy of freedom 
of exchange within the country are equally in favor of freedom 
of exchange between different countries. The lines which sepa- 
rate one country from another are frequently arbitrary political 
boundaries and do not necessarily interfere with the channels 
of advantageous commerce. These students would hold that 
there is no more reason why there should be an interference 
with freedom of trade across the St. Lawrence and the Great 
Lakes than across the Ohio River or the Mississippi. If there 
are individuals in Canada who desire products from the United 
States, and individuals in the United States who desire prod- 
ucts from Canada, there is no more reason why they should 
be forbidden to make the exchange than there is why two 
citizens from different states of the United States should be 
forbidden to exchange their products. 

443 



444 PRINCIPLES OF NATIONAL ECONOMY 

The diversion of labor and capital from the more productive 
into the less productive industries. The positive argument in 
favor of freedom of trade rests upon one or two fundamental 
propositions. One of these is that the labor and capital of any 
region tend of themselves to seek those opportunities and to 
develop those industries which are most profitable to them- 
selves. From this it would follow that any interference with 
this process, or any attempt to develop an industry in a region 
where it would not develop without special favors, must neces- 
sarily be a mistake. It would merely divert labor and capital 
from the more productive to the less productive industry. Left 
to themselves, labor and capital in the southern part of the 
United States will go into the growing of cotton without any 
governmental encouragement. This is a sign that cotton- 
growing is one of the most productive opportunities of that 
region. Any attempt to tax cotton-growing, and out of the 
proceeds to pay a bounty to some other industry, would mean 
merely that a certain a;mount of the labor and capital of the South 
would be diverted from the cotton industry, in which it is most 
productive, into an industry in which it would be less produc- 
tive. If the new industry is not less productive, labor and 
capital would go into it anyway; if it is less productive, it 
would be a waste of resources to divert labor and capital into 
it instead of allowing them to go where they would naturally go. 

Against this fundamental proposition of the free-trade school 
the protectionists have never been able to launch a successful 
frontal attack. They have, however, attacked the policy of 
free trade at other points. The arguments which they have 
been able to use have, on the whole, proved somewhat more 
popular than this severely simple doctrine on which is based 
the free-trade argument. There are six popular arguments in 
favor of protection, besides some others that are not so popular, 
though perhaps of greater scientific weight. These six argu- 
ments may be characterized as follows: (i) the baiance-of- 
trade argument; (2) the home-market argument; (3) the 
infant-industries argument; (4) the standard-of -living argu- 



FREE TRADE 445 

merit; (5) the antidumping argument; and (6) the necessity- 
for-mihtary-suppHes argument. 

The balance-of-trade argument. By the balance-of-trade argu- 
ment is meant the old theory that a nation is rich when it 
sells abroad more than it buys. There is a certain superficial 
analogy between the condition of the private individual and 
that of the nation. It looks at first thought as though the pri- 
vate individual who is selling more than he is buying were 
getting rich. This, however, is only an appearance. It is true 
that so long as he is selling more than he is buying he is accumu- 
lating money, but unless he invests that money sooner or later, 
it will do him no good. When he invests he is really buying 
something with it ; otherwise he merely becomes a miser and 
hoards his money instead of using it. The individual who 
saves or who accumulates money for a time, say for a year, 
may be prospering in the sense that he is accumulating the 
power to purchase something else later on ; but suppose that 
during the next year he invests all the accumulations of the 
preceding year : then it will happen that during this next year 
he will be buying more than he is selling. No one will contend 
that he grows poorer by the process. 

Similarly with the nation that continually sells more than 
it buys : if it never buys anything from the outside with this 
surplus, the money is of no use to it ; if it merely keeps it in 
circulation within its own boundaries, it will have more money 
in circulation, but no more goods. Sooner or later, however, 
this process must come to an end, for if prices continue to rise 
within the country, it becomes a poor country in which to buy 
products. Foreign buyers will, so far as possible, go to other 
markets for their supplies. At the same time it becomes a good 
country in which to sell. Foreign producers will seek to sell 
their goods within the country where high prices prevail, and 
if the prices are high enough the protective tariff ceases to be 
a hindrance. The combination of these two processes would 
speedily drain some of the surplus money out of the country; 
that is, when foreign producers sell large quantities to the coun- 



446 PRINCIPLES OF NATIONAL ECONOMY 

try, and foreign buyers purchase small quantities, there must 
come an equilibrium in prices so far as the commodities which 
enter into international trade are concerned. There are some 
commodities and services which do not enter into international 
trade, and the prices of these may remain on different levels 
for considerable periods of time. 

During the first year or two of the World War, which was 
inflicted upon an astonished world by the Turco-Teutonic 
powers, Americans had an excellent illustration of the fallacy 
of the balance-of-trade argument. We immediately began sell- 
ing vast quantities of supplies to the Allies, who were defend- 
ing themselves against attack and invasion. Their productive 
power was diverted from the field of industry into the field 
of war, so that they had very little to sell to us. The con- 
sequence was that vast amounts of money had to be sent in 
payment for the supplies which we sent to them. It looked 
for a time as though we were prospering amazingly by this 
process. Money was very abundant, but goods were becoming 
scarce. It was not long before the people began to realize that 
they could not live on money, — that, after all, goods were what 
they wanted. Some relief came when the United States began 
to lend the money back to the Allies, so that they could pur- 
chase more and more supplies; that is, some of the surplus 
money, instead of being used in the purchase of ordinary com- 
modities, was used in the purchase of foreign securities, in- 
cluding the bonds of foreign governments. 

Nothing could be more elementary or more incontrovertible 
than that every country must in the long run pay for its 
foreign supplies with its own products. If it happens to pro- 
duce gold and silver in large quantities, these must of course be 
reckoned among its own products, and it may pay for a portion 
of its foreign suppHes with this gold and silver. In the long 
run, therefore, the country that restricts importation must 
necessarily and in exactly the same degree restrict exportation. 

The home-market argument. As to the home-market argu- 
ment, this has been peculiarly effective with farmers. It has 



FREE TRADE 447 

been pointed out to them that unless factories are built in 
their own neighborhood, they must depend upon distant mar- 
kets for the sale of their products. To sell their products in 
these distant markets and get their own supplies back, it is 
said, involves heavy expenses in the form of freight rates. If 
these expenses, however, were so heavy as to overbalance the 
other advantages and disadvantages involved, manufacturing 
would be developed in the home market without any govern- 
ment aid or interference. If, for example, the difference in the 
cost of growing wheat in Alabama and North Dakota were 
less than the freight rates from North Dakota to Alabama, 
Alabama would find it advantageous, without any government 
help, to grow her own wheat ; but if it costs, let us say, twenty 
cents more per bushel to grow wheat in Alabama than in 
North Dakota, and the freight rate is only ten cents, then it 
would be very much more profitable to import wheat or wheat 
flour from North Dakota. 

The same principle would apply to manufacturing products. 
If the difference in the cost of manufacturing a yard of cloth 
in Kansas and in New England is less than the freight rate from 
New England to Kansas, some cotton manufacturer would be 
pretty certain to locate his business in Kansas in order to save 
that freight rate ; ,but if the difference in the cost of produc- 
tion is greater than the freight rate, then it would be a mistake 
to encourage the manufacture of cloth in Kansas. This prin- 
ciple would apply between different countries as well as between 
different sections of the same country. The home market, 
in short, is preferable to a distant market only when, with a 
given amount of productive energy, more can be produced by 
saving transportation than can be produced even when goods 
have to be transported over long distances. 

The infant-industries argument. As to the infant-industries 
argument, there is undoubtedly something to be said on the 
side of protection. The argument, is good, however, only on 
condition that the infant industry, after it is once established 
and ceases to be an infant industry, is then able to take care 



448 PRINCIPLES OF NATIONAL ECONOMY 

of itself without further protection. If it is not, and if it con- 
tinually needs protection, the policy is one not for the pro- 
tection of infant industries but for the protection of those that 
are in a state of senile decay. It is a policy for keeping alive 
industries that ought to be dead. 

There are two rather fundamental objections to a protective 
policy based on the infant-industries argument. In the first 
place, no matter how much protection is given to any industry, 
there will always be certain establishments that are just on the 
margin of bankruptcy. There will be men who are so poorly 
qualified for managing a business or who have located their 
businesses in such disadvantageous places that they have to 
compete with more productive industries for their labor and 
supplies and are thus barely able to keep going. Any attempt 
to double or treble the amount of production merely calls into 
existence business establishments run by less qualified man- 
agers or located in less advantageous positions, so that with 
respect to business establishments it becomes a truism that 
"the poor ye have with you always." Conversely, any attempt 
to take away or reduce the amount of protection will neces- 
sarily mean bankruptcy to those marginal establishments. 
They can always bring pressure to bear upon Congress and can 
always show convincingly that they would be ruined if pro- 
tection were taken away. Thus the infant-industries argument 
sooner or later inevitably becomes an argument in behalf of 
the small or the inefficient producer. In the second place, as 
laws are made in any democratic country, the lobby (which 
has sometimes been called the third House of Congress) is a 
powerful factor. The real infant industry is seldom able to 
support a powerful lobby. Generally speaking, the larger and 
more prosperous the industry, the larger and more efficient the 
lobby which it can support. This makes it extremely improb- 
able that the infant industry will get protection and extremely 
probable that the gigantic industry will get it. 

The standard-of-living argument. By the standard-of-living 
argument is meant the contention that, since American laborers 



FREE TRADE 449 

get higher wages and maintain a higher and more expensive 
standard of living than most foreign laborers, it is necessary 
to compensate the manufacturer for these higher wages by 
enabling him to get somewhat higher prices for his product. 
From the free-trader's point of view this looks like putting 
the cart before the horse. The reason why wages are higher 
in one country than another is that labor is more productive 
in the one than in the other. If labor is more productive the 
laborer creates the product out of which his higher wages are 
to be paid. We have had such an abundance of natural re- 
sources and, on the whole, compared with old and overcrowded 
countries, such a dearth of labor that the marginal productivity 
of labor has been high in this country. The unprotected in- 
dustries pay these wages as well as do the protected. If a given 
industry is not able to compete against agriculture and mining 
in hiring labor, that is a sign that the industry in question is 
not so productive as agriculture and mining. Therefore it 
would be a mistake to tax the more productive industries in 
order to allow a bounty or a higher price to the less productive 
industry. In the past, at any rate, there have been so many 
opportunities for poor people to go onto the land and work 
for themselves, and eventually to become landowners, that 
manufacturers have had some difficulty in getting labor for their 
factories. In other words, labor has found a better opportunity 
somewhere else. Two methods have been resorted to by the 
manufacturers to overcome this difficulty. One has been the 
wholesale importation of foreign labor ; the other, the securing 
of protective duties in favor of their business. It would seem 
that anyone with a sense of humor could hardly keep his face 
straight while importing the cheapest kind of foreign labor to 
fill his factory and at the same time demanding protection in 
order that American labor might maintain its high standard 
of living. 

The antidumping argument. As to the antidumping argu- 
ment, there is a certain justification for it. By the antidumping 
argument is meant the argument that an old and well- 



450 PRINCIPLES OF NATIONAL ECONOMY 

established industry may, whenever it finds itself with a surplus 
product which is difficult to sell in its own country, offer it 
for sale in a foreign country far below the cost of production ; 
or, as the argument is put in the country where protection is 
advocated, the foreign producer may dump his surplus onto 
our markets and demoralize the business of production here. 

In so far as this dumping policy is temporary and spasmodic, 
there is a good deal to be said in favor of the policy which will 
restrict it. If, for example, a group of foreign manufacturers 
were to dispose of a temporary surplus in this country far 
below the cost of production, and keep it up spasmodically for 
a few years, it might cause bankruptcy among our own pro- 
ducers and discourage others from entering the business. As 
a result we might find ourselves in a short time with no industry 
of our own. Then the foreign producers would no longer need 
to dump their surplus onto us, but could charge us a good 
high price. 

On the other hand, if the policy of dumping a surplus product 
on our markets is a permanent one, there is everything to be 
said in favor of allowing it to go on and allowing the home in- 
dustry to die out. It merely enables us to get permanently a 
product much cheaper than that which we could produce our- 
selves. The labor and capital which would otherwise be engaged 
in this industry would now better be engaged in some other. It 
has been humorously pointed out that the greatest case of 
dumping in the world is that of the sun, which sends us light 
and heat at ruinously low prices. Inasmuch as it is a permanent 
policy of the sun, we can easily adjust ourselves to it and dis- 
pense with any industry which would propose to supply us with 
daylight and summer heat. 

Not many years ago certain countries gave a bounty for 
the export of sugar. This looked like a permanent policy for 
encouraging the dumping of a certain commodity on other 
markets. The chief result was that England, a free-trade coun- 
try, got an abundant supply of very cheap sugar. This not 
only gave her a cheap food product but enabled her to develop 



FREE TRADE 451 

certain industries, such as the making of jam and marmalade, 
on a large scale and to sell the products of these industries on 
the markets of the world, sometimes selling them back to the 
countries which had given a bounty on the exportation of sugar. 

The military-defense argument. So long as war is a possi- 
bility the necessity for military defense will remain with us, 
and so long as we must be prepared for military defense the 
argument in favor of producing certain essential military sup- 
plies at home, even at greater cost than that at which they could 
be procured from abroad, will be overwhelming. It is obvious 
that at the very time when we need military supplies most — in 
time of war — we may not be able to get them at all if we 
depend upon foreign sources. This would apply not only to 
military supplies in the technical sense (that is, goods and 
ammunitions) but also to every article which is indispensable 
in time of war. It might easily happen that a nation would fail 
in its military operations by reason of a lack of some single 
military article like nitrogen or copper and suffer a national 
disaster and humiliation in consequence. Until we can be 
reasonably certain that war has been permanently eliminated, 
the argument for government encouragement of the production 
of every indispensable military article is overwhelming. The 
free trader really has nothing effective to say against it. 

Aside from these six arguments there are certain large his- 
torical arguments that are frequently used by the protectionist. 
It is pointed out, for example, that America has prospered 
amazingly under a protectionist policy. It is, however, equally 
true that England has prospered amazingly under her free- 
trade policy. She became prosperous before her European 
neighbors did, and outstripped them all, at least during the first 
half century of her free-trade policy. Again, the protectionist 
points to the recent rapid advance in prosperity and industrial 
power of Germany as an example of the beneficence of the pro- 
tectionist policy. To this the free trader may retort, first, that 
Germany's prosperity began with the formation of the German 
Empire in 1871. The taking away of the tariff walls between 



452 PRINCIPLES OF NATIONAL ECONOMY 

the German states and the estabUshing of a free-trade area 
within the whole empire created a much larger free-trade area 
than had formerly existed. Second, the efficiency of the Ger- 
man system of technical education has contributed more than 
any other single factor to her prosperity. In the third place, 
Germany has had the advantage of a lower standard of living. 
England became prosperous long before Germany did, and as a 
result of her prosperity wages rose and likewise salaries and 
all living expenses. The English workingman gets higher wages 
than the German workingman. All the salaried men in Eng- 
lish factories get higher wages and work shorter hours than 
the salaried men in German factories. The English agents in 
foreign ports not only get higher salaries but insist on week- 
end holidays and on having several afternoons off during the 
week in order to play golf and tennis, whereas the German 
agent works continuously every day and Sunday. In other 
words, part of Germany's advantage has been her lower stand- 
ard of living. The free trader would say, "Let's wait and see 
how long Germany can maintain her low standard of living 
after she has become as prosperous as England." It may be 
that after she has enjoyed prosperity as long as England, 
there will come the same softening in her vigor, the same 
desire for luxurious expenditure and leisure, and she will thus 
lose her chief advantage in international competition. If it is 
any comfort for the protectionist to point out that free trade 
tends to overprosperity, and prosperity to softening, he is 
welcome to it. 



CHAPTER XXXII 
PROTECTIONISM 

The weight of the argument in the last chapter was over- 
whelmingly in favor of free trade except in the matter of war 
supplies. Sometimes, however, it seems as though the free 
traders were willing and able to answer all the arguments in 
favor of protection except the real ones. They confine them- 
selves, in other words, to the popular arguments which have not 
now and never did have any support from serious students of 
the problem. The following arguments may not appeal to the 
popular mind nor furnish much support to any particular tariff 
bill ; they do, however, outline certain possibilities of a protec- 
tive tariff which may be realized if the government really wants 
to go about it seriously. 

Some possibilities of a protective tariff.^ (i) A tariff duty is 
not necessarily paid by the home consumer ; ( 2 ) a protective 
tariff may be so framed as to raise wages; (3) it may be so 
framed as to attract labor and capital from the less productive 
into the more productive industries, — judged from the stand- 
point of the community rather than from that of the individual 
business man. 

When the consumer pays the tariff. Whether the home con- 
sumer pays the tariff duty or not depends upon whether or 
not it raises the price, in the home market, of the article 
upon which it is collected. Whether it raises the price or not 
depends upon whether it reduces the supply of the article 
in the home market or not, it being assumed that the duty will 
not affect the demand. The effect of a duty is ordinarily to 
reduce the amount of the article imported. The question is, 

iThe rest of this chapter is from a paper read by the author before the 
American Economic Association and published in the Proceedings of the asso- 
ciation in 1902. 

453 



454 PRINCIPLES OF NATIONAL ECONOMY 

Will the home product then increase, as a result of the duty, 
sufficiently to counterbalance the diminution in the amount 
imported? If the conditions are such that a tariff duty will 
occasion an increase in the domestic product equal to the 
diminution in the amount imported, the duty will occasion no 
change in the total supply on the home market and conse- 
quently no general change in the price of the article ; but if the 
domestic product does not increase sufficiently to offset entirely 
the diminution in the amount imported, there will be a de- 
crease in the total supply on the home market and consequently 
a rise in price. 

When the increase in home production offsets the decrease in 
importation. The question then becomes, Under what condi- 
tions will a tariff duty occasion sufficient increase in the domes- 
tic product to counterbalance the diminution in the amount 
imported ? If the duty is laid upon an article not producible at 
home under existing conditions and at existing prices, there can 
manifestly be no such increase in the domestic product^ and the 
price will rise in consequence of the duty. How large a share 
of the duty will be added to the price of the article will depend 
upon the comparative elasticity of the demand and the supply. 

When the foreign producer pays the tariff. If the demand is 
highly elastic, while the supply is inelastic, only a small propor- 
tion of the duty will be added to the price ; that is to say, an 
elastic demand means that if there is a slight rise in the price 
of the article to the consumer, it will cause a great falling off 
in the amount purchased. In other words, the consumer may 
be said to have considerable power of resistance. On the other 
hand, if a considerable fall in the price which the producer can 
get will cause only a slight falling off in the amount produced, 
as will happen when there are considerable differences in the cost 
of producing different parts of the supply, the supply is inelas- 
tic. When the demand is elastic and the supply relatively ine- 
lastic, the burden of a tariff duty will be borne largely by the 
foreign producer and only to a slight degree by the home con- 
sumer. Reversing the argument we shall reach the conclusion 



PROTECTIONISM 455 

that when the demand for the article is inelastic and the supply- 
relatively elastic, the burden of the duty will fall largely upon 
the home consumer. 

When a tariff is prohibitive. When both the supply and the 
demand are very elastic a tariff duty will tend to be prohibitive ; 
that is to say, if a slight rise in the price to the consumer would 
cause a large falling off in the amount consumed, and a slight 
fall in the price to the producer would cause a great falling off 
in the amount sent to the tariff country, manifestly neither 
the producer nor the consumer can be made to pay the tariff, 
and the article will practically cease to be imported. 

If the article is produced at home, but under the law of ex- 
panding cost (commonly confused with the law of diminishing 
returns), the presumption is that as much is already being 
produced at any given time as can be produced at existing 
prices. The one condition for an increase in the home product 
is that there shall be a rise in price. It is evident that the do- 
mestic product could not increase sufficiently to keep the prices 
down, for the reason that in this case there could be no increase 
in the home production. A duty on such an article would raise 
its price and be borne, in part at least, by the home consumer. 

In case the duty is laid upon an article which is produced at 
home under the law of diminishing cost (provided its produc- 
tion has not been 'monopolized), a different result follows. In 
a case of this kind the shutting out of a part of the foreign 
supply increases the opportunities for the marketing of the 
home product ; and since the latter is increased without any 
increase in cost, there is nothing to prevent it from increas- 
ing enough to offset entirely any diminution in the amount im- 
ported. In this case there is no reason to expect that the price 
will be higher under the tariff than it would be without the tariff. 

The shutting out of a part of the foreign supply is analogous 
to a normal growth in the consumption of the article, at least in 
so far as it affects the home producers. They find an increase 
in the consumption of their products, and it makes no dif- 
ference to them whether this is due to a decrease in importa- 



456 PRINCIPLES OF NATIONAL ECONOMY 

tion or to a growth in the normal consumption of the article. 
Few economists would contend that a normal growth in the 
consumption of an article which could be indefinitely increased 
at diminishing cost would cause the article to sell at a higher 
price. It is the position of this chapter that there is no better 
ground for contending that a tariff duty on an article already 
producible at home under the law of diminishing cost would 
raise the price of the article, or that when there is no natural 
check, such as increasing cost, to the home production there 
is no reason why the home production may not increase enough 
to make up entirely for any falling off in the amount imported.^ 

The case of monopoly. If, however, the article is one whose 
home production is in the hands of a monopoly, the shutting 
out of a part of the foreign product would increase the monop- 
oly's power over the home market and give it an opportunity to 
exact a somewhat higher price than would otherwise be pos- 
sible. There is a very widespread belief that a monopoly fixes 
the price of its product according to a different principle from 
that which is followed by a single producer in a competitive 
industry, but such is not the case. In either case the price is 
fixed at the point which will yield the largest net income to the 
producer. The difference is that the individual producer in a 
competitive industry has to face a different set of conditions 
from that which confronts the monopolists. The competitive 
producer knows that if he charges too high a price for his prod- 
ucts, his sales will fall off rapidly, not only through the unwill- 
ingness of the public to buy the product but also through his 
being undersold by his competitors. If he held a monopoly he 
would know that a similar rise in the price of the product 
would cause his sales to fall off less rapidly because only one 
(namely, the former) of those two forces would operate. 

While both the monopolist and the competitive producer try 
to sell at the point of highest net return, that point is likely to be 
somewhat different in the two cases because of the differences 

iln fact, there are reasons for believing that the price would fall. 
Cf. Alfred Marshall, Principles of Economics (fourth edition), p, 525. 



PROTECTIONISM 457 

in the conditions which confront the two producers. The com- 
petitive producer has two checks on high prices, where the 
monopolist has one ; hence a monopoly price is Hkely to be 
higher than a competitive price. A tariff duty which shuts out 
a part of the foreign product removes one of the checks upon 
the power of a monopoly to charge high prices and changes the 
location of the point of highest net return. 

Can a tariff increase wages ? Whether a protective tariff can 
increase the price of labor or not depends first upon whether or 
not it is possible, by means of a tariff, to increase the demand 
for labor relatively to the demand for other factors of produc- 
tion. If this can be done labor will get a larger share of the 
total product of the industry of the community. This alone 
would not prove that the individual laborer would in the end be 
better off. In the first place, the supply of labor might increase 
correspondingly, either through immigration or by natural 
means, and in this event there would be no increase in indi- 
vidual wages, even though a larger share of the total product 
did go to the payment of labor. In the second place, the tariff 
might diminish the total product of industry so that even though 
the laborers did get a larger share of the total the absolute 
amount going to them as wages might be no greater than, indeed 
not so great as, before. 

As to the first objection, it needs only to be said that if the 
tariff increases the demand for labor, that will tend to raise 
wages. Whether or not this tendency will be counteracted by 
immigration or by natural increase depends upon other condi- 
tions. If the tariff stimulates immigration or increases the birth 
rate over what it would be without a tariff, the presumption is 
that it does so because it increases the demand for labor and 
raises wages, which is all that this chapter contends for. Wages 
may or may not be subsequently reduced to the old level by 
other forces counteracting the tendency of the tariff. As to the 
second condition, it is hoped that the third part of this chapter 
will show that a protective tariff does not necessarily diminish 
the total product of industry. 



45 8 PRINCIPLES OF NATIONAL ECONOMY 

Owing to the limited space available it is necessary to assume 
two premises as the basis of the argument for the proposition 
that a protective tariff may be so framed as to raise wages 
within the country, (i) The three factors of production — 
land, labor, and capital — are combined in different proportions 
in the production of different commodities. (2) A selected in- 
dustry may be stimulated and made to grow by means of a 
protective tariff. Both these propositions could be proved if 
space allowed, but neither is likely to be disputed by any con- 
siderable number of people. Assuming them to be true, it is 
necessary only to stimulate, by means of a protective tariff, the 
production of those articles into which labor enters as the prin- 
cipal factor, leaving unprotected those industries into which 
labor enters as a relatively less important factor. This is a 
process of artificial selection in which the variation which makes 
selection possible is found in the different proportions in which 
the three factors are combined in the different industries. The 
favorable variations, from the standpoint of the laboring class, 
are those industries in which labor is relatively the more impor- 
tant factor, and the unfavorable variations are those in which 
labor is relatively the less important factor. In order to favor 
the laboring class it is necessary only to select the favorable 
variations ; that is, to build up by artificial means those indus- 
tries in which labor is the principal factor. Even though 
this should result in a corresponding injury to other indus- 
tries, there would still remain a net gain to labor. 

Let us suppose, by way of illustration, that in industry A, 
at a given period, the best results, from the standpoint of the 
entrepreneur, are ordinarily obtained by combining 1000 acres 
of land, 10 laborers, and $100,000 worth of capital. These 
yield a product worth $20,000. In industry B, to get a product 
of the same value, the best results would be obtained from com- 
bining the factors in the following proportions : 10 acres of land, 
20 laborers, and $100,000 worth of capital. Wages and interest 
are assumed to be the same in the two industries. For the sake 
of simplicity capital is assumed to bear the same ratio to product 



PROTECTIONISM 



459 



in the two industries, land and labor being the varying factors. 
By building up industry B, even at the expense of industry A, 
there will result a net increase in employment of labor, though 
a corresponding decrease in the employment of land. This 
increase in the employment of labor means an increase in the 
demand for labor, while the decrease in the employment of land 
means a decrease in the demand for land. The result of this 
situation would be that a larger share of the total product 
would go in the payment of wages and a smaller share in the 
payment of rent. 

In the following tables, I represents the conditions as de- 
scribed above ; II, the situation after industry B has been ex- 
panded 50 per cent and industry A has been correspondingly 
contracted. 





Acres 


Laborers 


Capital 


Product 


Industry A 

Industry B 


1000 
10 


10 

20 


$100,000 
100,000 


$20,000 
20,000 


Totals 


lOIO 


30 


$200,000 


$40,000 




II 






Acres 


Laborers 


Capital 


Product 


Industry A 

Industry B 


500 
15 


5 
30 


$50,000 
I 50,000 


$10,000 
30,000 


Totals 


515 • 


35 


$200,000 


$40,000 





This shows a decrease of 495 in the number of acres used and 
an increase of 5 in the number of men employed. 

We need here to guard against the possibility that industry 
B, while using fewer acres of land, might require a kind of land 
that is so very scarce that the rent charge would be higher 
than in A. But this is not a necessary condition. It is quite 
conceivable that the two industries would use the same grade 
of land. It is even conceivable that industry B, in addition 
to using fewer acres, would also use a more abundant kind 



46o PRINCIPLES OF NATIONAL ECONOMY 

of land, where rents were less per acre. The whole difficulty- 
could be avoided by starting with the proposition that in dif- 
ferent industries rent charges, wages, and interest enter in 
varying proportions. Then, by selecting for governmental 
favor those industries in which wages, rather than rent or 
interest, form the chief item of expense, the total industry of the 
country would be affected favorably from the standpoint of the 
wage receivers. 

It goes without saying that an entirely different result would 
be obtained by selecting for governmental favor those indus- 
tries in which rent or interest form the chief item of expense, 
— a result advantageous to the landlord or the capitalist, but 
disadvantageous to the laborer. It must be confessed also that 
as protectionism has been applied in the past, especially in 
England before the repeal of the corn laws, this result was 
quite as frequently obtained as the other. There is some dan- 
ger also that it will be so in the future, owing to the better 
lobbying facilities of the landowning and capitalistic classes. 
But that is another matter. 
j Does a tariff favor the less productive industries ? The prop- 
osition that protection attracts labor and capital from the 
more productive to the less productive industries has long been 
one of the basic principles of the free-trade school, — the rock 
on which all protectionist theories were supposed to split. 
And it must be conceded that unless this position can be suc- 
cessfully assailed, the free trader will always have the advan- 
tage in the argument. 

The difficulty with the proposition lies in the double meaning 
which is given to the word "productive." In order to make a 
true proposition of it this word must be given a certain meaning, 
but in order to make it a conclusive argument the word must 
have quite a different meaning. From the standpoint of the in- 
dividual business man a productive industry is a profitable^ 

iFor want of a better term the words "profit" and "profitable" are used 
in the more popular sense which agrees with the use of the terms by the older 
writers on economics. Profit is made to include the surplus income of an in- 
dustry over and above the cost of conducting it. In this broad sense it includes 



PROTECTIONISM 461 

industry; that is, an industry which offers the opportunity of 
making a surplus gain over the cost of running the business. 
From the standpoint of the community a productive industry is 
one which increases the sum total of utilities. It is the profit- 
ableness of the industry, rather than its productiveness in the lat- 
ter sense, which causes labor and capital to go into it. It is only 
by defining '^ productive" as "profitable" that one can support 
the proposition that labor and capital will seek those industries 
which are naturally most productive. In that sense, and in 
that sense alone, it is quite true that protection attracts labor 
and capital from the more productive to the less productive 
industries. 

Meaning of the word "productive." But in order to have any 
weight as an argument this proposition must mean that protec- 
tion attracts labor and capital from those industries which create 
more utilities into those which create fewer utilities. That is 
to say, the word ^^ productive" must mean something more than 
"profitable." The difficulty could be met only by showing that 
the industry which is profitable from the standpoint of the in- 
dividual business man is always a productive industry from the 
standpoint of the community. If this cannot be shown, it means 
that labor and capital, if left to themselves, will, in seeking the 
largest profits, sornetimes go into the less productive industries. 
There would then be a possibility that protection or some other 
form of government interference might be able to attract labor 
and capital from a less productive industry, into which they 
would naturally go in pursuit of profits, into a more productive 
industry, from which they would naturally have been excluded 
by the smallness of the profits. This possibility would become a 
reality if the relative profitableness of the two industries could 
be reversed by some kind of government discrimination. 

The question then becomes. Are the more profitable indus- 
tries always the more productive? Manifestly not. To say 

rent and every other form of surplus. A profitable industry would therefore 
be one which would yield a surplus income of some kind. This surplus is what 
attracts the director of industry, and it is the surplus-producing power of an 
industry which determines whether or not labor and capital shall go into it. 



462 PRINCIPLES OF NATIONAL ECONOMY 

nothing of certain lines of business which are acquisitive in 
their nature and not productive at all, there are certain highly 
productive industries which have very little power of attracting 
individual enterprise. 

The case of lighthouses. To begin with an extreme case, 
there is the work of maintaining lighthouses. This illustration 
is chosen not because it is supposed to be typical of those in- 
dustries which are fitted to receive protection but solely because 
it serves to make clear that there may be a productive industry 
which offers no inducements for private enterprise. On the one 
hand, this work has all the earmarks of a productive industry. 
It produces a real utility ; this utility is of a materialistic sort, 
not moral or social as is that produced by educational and other 
similar institutions, and it is produced by purely mechanical 
processes. There is nothing in the nature of the utility pro- 
duced or its processes of production to distinguish this from any 
money-making business. On the other hand, this industry of- 
fers no incentive to private enterprise (that is^ no opportunity 
for private profits) for the one sufficient reason that the pro- 
ducer cannot control his product. The lighthouse will shine 
upon those who do not pay for it as well as upon those who do. 
He is therefore not in a position to exact a payment for his 
product corresponding to its utility. 

It will doubtless be objected that this is a case calling for 
government ownership and operation rather than protection, 
and the point would be well taken. This is a business so com- 
pletely devoid of opportunity for profitable enterprise that no 
kind of protective tariff would be able to make it profitable. 
Nothing but a subsidy could induce private capital to go into 
it, and the subsidy would have to cover the whole cost. In that 
case the government might just as well, it may be maintained, 
own and carry on the business. But the difference between this 
industry and one which would lend itself to protective measures 
is one of degree only. 

Industries differ widely in this particular : whereas one, such 
as the maintenance of lighthouses, produces a utility that can- 



PROTECTIONISM 463 

not be controlled at all in the interest of the owner, another 
produces a utility of such a nature that the owner can exact 
full payment from those who use it, while still another produces 
no utility at all, but is purely acquisitive in its nature. An 
example of the last (not to come too near home) would be the 
medieval baron who took possession of a natural ford or a 
mountain pass, set up his castle, and went into the business 
of collecting toll of all who passed that way/ These three 
industries do not belong to sharply differentiated classes,, but 
shade off gradually into one another. That is to say, there 
is a gradual shading off, from the business which creates utilities 
far in excess of any amount which the owner of the business can 
collect, to the business which can collect a revenue far in excess 
of any utility actually created by it. Here again we have a 
form of variation which makes artificial selection possible, the 
favorable variations being those industries which come under 
the former description. 

No complete harmony of human interests. In considering this 
aspect of economic life too much has been usually assumed as 
to the harmony of human interests. Nothing is more funda- 
mental in economic science than the proposition that there is 
an antagonism of human interests. If there were a complete 
harmony of interests labor and capital might be expected to 
seek those industries which are most productive from the social 
standpoint. But aside from the observable fact that labor and 
capital do nothing of the kind^ it is a matter of common observa- 
tion and experience, confirmed by reflective analysis, that there 

iThis is a business to which the principle of "charging what the traffic will 
bear" applies beautifully. What the traffic will bear is in this case determined 
by the superiority of the ford or pass in question over other available ways 
that are open. Let us assume that instead of merely collecting toll the baron 
spends some trifling sum in the improvement of the passage, still charging 
what the traffic will bear. His business then becomes slightly productive, but 
its productiveness is small as compared with its profitableness. Then let us as- 
sume that he gradually increases his expenditures for the improvement of the 
passage until the utility created approximates more and more nearly to the 
charges collected : at each stage of the process his business will represent some 
type actually carried on among us today. 



464 PRINCIPLES OF NATIONAL ECONOMY 

is no such harmony of human interests. One man's interest is 
served by having the labor and capital of the community di- 
rected in one line, another's by having them directed in quite a 
different line. More than that, there is great inequality among 
individuals in the power of giving direction to the industry of 
the community. The one who owns land or capital in addition 
to his own labor is in a better position, other things being equal, 
to determine the direction of business activity than is the one 
who owns only his labor power. We therefore have not only 
the certainty that each individual will try to direct business 
activity in the line most conducive to his own interests, and 
that in many cases his interests will not harmonize with those 
of the community, but also the certainty that the power to 
give this direction differs greatly among different individuals. 
If we did not know it as a matter of direct observation and 
experience, we might predict from these premises that the 
business activity of the community would not, in all cases, be 
directed in the most productive lines and that therefore it 
would be possible, by some form of discrimination, to at- 
tract labor and capital from the less productive to the more 
productive industries. 

Turning land into sheep runs. The following illustration may 
add something to the concreteness of this conclusion. Let us 
suppose that a certain tract of land has been devoted to cultiva- 
tion of a fairly intensive kind and has been producing enough 
to pay the wages of twenty laborers, with something left over 
for rent. Through some change of circumstances the price of 
wool rises, and it is found more profitable to use the land for 
wool-growing. By turning the land into a sheep run, nineteen 
of the laborers may be dispensed with, and the saving in wages 
would more than measure the difference between the value of 
the wool crop and that of the present crop, so that a larger 
surplus would be left over as rent. There is little doubt that 
the land would then be devoted to the growing of wool. That 
would be to the interest of the landlord and against the interests 
of the nineteen laborers, but the landlord is in a better position 



PROTECTIONISM 465 

than they to determine the form of cultivation. There is also 
little doubt that this would be contrary to the interest of the 
community. Less wealth would be produced either for con- 
sumption or for international trade. Fewer people could be 
supported, or the same number would not be as well supported 
as formerly. 

If the nineteen men thrown out of employment cannot find 
places elsewhere they will, since they want to live, probably 
offer their labor at lower wages, — enough lower to enable the 
landlord to get as much rent from the more intensive form of 
cultivation as he might get by the less intensive form. Here we 
have the somewhat anomalous situation of an increase in the 
price of one of the products of industry causing a fall in the price 
of labor. The key to this anomaly is found in the fact that 
what is cost to one man is frequently gain to another. Now in 
this supposed case (which is not altogether a supposed case) 
there is little doubt that some form of discrimination in favor 
of tne present crop and against wool would increase not only 
the relative share of the produce going to labor but the absolute 
amount of the produce of the land that would otherwise be 
devoted to wool-growing. 

And this is a rule which works both ways. In a community 
where land is extensively cultivated, it is presumably because 
extensive cultivation produces the best results from the stand- 
point of the landowner. Any one of the following conditions 
may induce him to change to intensive cultivation : ( i ) a fall 
in the price of labor ; (2) a fall in the price of the products of 
extensive cultivation ; (3) a rise in the price of the products of 
intensive cultivation. There lies the opportunity for the protec- 
tionist. By some discrimination which would tend to increase 
the profitableness of the intensive product, an absolutely larger 
and more valuable product might be created. This would sup- 
port a larger number of people, or support them better. They 
would have a larger number of products either for consumption 
or for international trade. Labor and capital would have been 
attracted from the less productive to the more productive Indus- 



466 PRINCIPLES OF NATIONAL ECONOMY 

try. Since a protective tariff is one means by which the relative 
profitableness of different industries may be changed, it follows 
that a protective tariff may be a means of increasing the total 
product of the industry of the community. 

It may be argued/ however, that ^'either these nineteen men 
have a preferable alternative, under the free-trade regime, to 
wheat-raising, or they have not. If they have not they will 
accept low enough wages, rather than be unemployed and have 
nothing, so that the landowner can realize as much rent for his 
land as if he used it for a sheep run. Unless their efficiency is 
thus impaired they will then produce as much wheat as if they 
were protected. The effect of freedom from restriction may mean, 
in this special type of case, lower wages and higher rent, but not 
decreased national wealth. If, however, the nineteen men have 
a preferable alternative they will not raise wheat but will occupy 
themselves otherwise at higher wages than wheat-raising under 
free trade would yield them, while the landowner will at the 
same time realize the higher rent assumed to result from iTsing 
his land as a sheep run. Free trade would then raise rent more 
than it would lower wages." 

To this it may be replied that ^4n case the nineteen laborers 
decided to accept lower wages and continue growing wheat, 
there need not be any diminution in the total product. The 
result would simply be lower wages, higher rent, and the same 
total product as before, as has been shown already. In case, 
however, the nineteen laborers decide to enter some other call- 
ing it must, of course, be a somewhat more remunerative one 
than wheat-growing under the new conditions. It could not, 
however, be so remunerative as wheat-growing had been under 
the earlier conditions, before the assumed rise in the price of 
wool ; otherwise they would not have been growing wheat in 
preference to following this new occupation. In short, their 
wages are somewhat reduced by the enforced change as com- 
pared with what they were formerly getting, but not so much 

^See note by H. G. Brown and the author's rejoinder in the Quarterly 
Journal of Economics for May, 1919, pp. 568-572, 



PROTECTIONISM 467 

reduced as they would be if they had no alternative employment 
but were compelled to continue growing wheat at such wages as 
would leave the landowner as high rent as he might get by 
turning his land into sheep pasture. When this alternative occu- 
pation is open, the changes assumed would raise rent and reduce 
wages somewhat, but not so much as in the other case. 

''Will these changes raise rent more than they will lower 
wages ? Yes, if we are thinking of world economy ; not neces- 
sarily if we are thinking of national economy. In order to find 
a satisfactory alternative employment the nineteen laborers 
may emigrate. In case they do, the national product will 
obviously be reduced and will support a smaller population, 
though the landowner's rent would be slightly increased. From 
the standpoint of world economy the increase of the total pro- 
ductivity of industry is probably not among the theoretical 
possibilities of protectionism ; from the standpoint of national 
economy, it is. The protectionist is, rightly or wrongly, com- 
monly a nationalist, and from his point of view he finds here at 
least a theoretical possibility." 

Free buying and selling not always socially advantageous. 
The argument of the protectionist in its most general form is 
that free and unrestricted buying and selling does not neces- 
sarily or in all cases result in the highest utility to the nation — 
in other words, that the market price is not an invariable indi- 
cator of social utility. If this were true, so that following the 
best market price would invariably lead individuals to promote 
the highest social utility, there would never be any valid ground 
for protectionism or any other interference with business, inter- 
nal or external, domestic or foreign. If, however, following the 
best market price, either in buying or selling, may sometimes 
lead individuals to do things which are not of the highest social 
utility, there is at least a theoretical possibility of advantageous 
interference with the process of free buying and selling. One 
could not optimistically close his eyes and say "everything is 
working for the best" without any interference or regulation 
whatsoever. There is at least a theoretical possibility for im- 



468 PRINCIPLES OF NATIONAL ECONOMY 

provement through restrictive regulation. The practical prob- 
ability, however, is limited by the wisdom or disinterestedness 
of lawmakers and administrative oiScials. If they are no wiser 
or more disinterested than the average buyer and seller, that 
probability is very small. 

Regulation not always wise. Whether this theoretical possi- 
bility for improvement through restriction or regulation can be 
realized depends somewhat on the character of the government 
and its officials. The free trader has at least the opportunity 
to say that government is just as inefficient as business ; that 
following the election is just as likely to lead one astray as 
following the market ; that the political policy that will get the 
most votes is just as likely to be wrong as the commercial 
policy that will get the most money. Even granting, therefore, 
the theoretical possibilities of wise protectionism, he might deny 
the probability of ever realizing these possibilities and affirm 
on the contrary that the general experience is that when govern- 
ments attempt to interfere with freedom of trade by any sort 
of protective policy, they usually make matters worse instead 
of better ; that they are just as likely to protect the industry 
that ought not to have protection as the one that ought to have 
it ; and that therefore the free-trade policy works better in the 
long run than the protective policy, in spite of all the theoretical 
possibilities of protectionism. The writer adheres to this opin- 
ion, not only with respect to the question of free trade and 
protectionism but with respect to most other questions of 
government interference. 

COLLATERAL READING 

Dunbar, Charles F. The Theory and History of Banking (third edition, 
revised and enlarged by Oliver M. W. Sprague). New York, 191 7. (The 
clearest exposition of the subject yet published.) 

PiERSON, N. G. Principles of Economics, Part I, chap, i, §§ 2-6. New 
York, 1902. (A clear exposition of the theory of value.) 

Taussig, F. W. Principles of Economics, Book IV. New York, 191 1. 
(A most complete statement of the principles governing international trade.) 



PART V. DISTRIBUTION 



CHAPTER XXXIII 

THE LAW OF VARIABLE PROPORTIONS 

The problem of the distribution of wealth is the problem of 
dividing the products of the industries of the nation among the 
various classes. The claim of each class to a share of the 
wealth is usually based upon the claim that each has contributed 
something to its production. The contribution may be labor, 
either mental or physical ; it may be capital, or the results of 
foresight or investing ; or it may be land which the owner has 
appropriated or otherwise come into possession of, and which 
he puts to use or permits someone else to use. 

The market value of services. The market value of what 
each has to offer determines his share in the product. If the 
market value of labor is high, the laborer gets a large share ; 
if it is low, he gets a small share. The same is true of that 
which each has to offer. Our first problem must be, therefore, 
to study the market value of each factor, or agent, of produc- 
tion in order to find out why the seller of each factor gets a 
large or a small share. 

The income of each class, however, is a flow rather than a 
fund or a lump sum. The laborer sells not himself but the flow 
of productive energy which he can exert during a given period 
of time. The capitalist, when he gets interest, sells not his 
capital but the flow of utilities which come from his capital 
during a given period of time. If the laborer were a slave he 
might be sold bodily, and in that case he would bring a price. 
The capitalist and the landlord may sell their capital and their 
land outright for a price. This involves a question of exchange 
and market price. When they sell the flow of utilities which 
their properties yield we have interest and rent, which are ques- 
tions of distribution. The following outline will indicate the 

471 



472 PRINCIPLES OF NATIONAL ECONOMY 

relation of these various problems to the general problem of 
valuation.^ For convenience the flow of utiHties yielded by 
the various factors of production are called services. 

( r Consumers' goods 

Of goods \ f Land 

[ Producers' goods < Capital 
Valuation \ [ Laborers (under slavery) 

{Of land (yielding rent) 
Of capital (yielding interest) 
Of laborers (earning wages) 

Why productive agents are desired. The reason for paying 
for an agent of production is that it helps to produce something 
which is desirable. Its value is derived from that of its product, 
or, as some would say, a part of the value of the product is 
imputed to the productive agent. At any rate, the producer of 
a desirable thing may itself be desired, or a thing may be de- 
sired because of what it will produce as well as for its own sake. 
The greater its product, or the greater its contribution to the 
joint product of a group of factors, the greater its value. It is 
therefore of the utmost importance that we find out, if such a 
thing is possible, how to determine the contribution of each 
factor. This is one of the most elusive problems in the whole 
field of economics. The student is requested to study this 
problem as carefully and intensely as he would an intricate 
problem in physics or chemistry. 

A combination of the factors of production not a chemical 
combination. In Chapter XVII we saw the necessity of a 
proper balance not only among the factors of production but 
also among all the factors of national life. But some variation 
among the factors of production must always be allowed„ What 
constitutes the perfect balance depends upon a number of 
considerations which have not yet been discussed. Factors of 
production, when used in combination, are not like the ele- 
ments in a chemical reaction or the colors in a picture. These 

1 Compare note by the author on "The Place of the Theory of Value in 
Economics," jjj the Qiuirterly Journal of Economics, November, 1902. 



THE LAW OF VARIABLE PROPORTIONS 473 

probably admit of no variation. The factors of production 
may always be combined in different proportions without 
destroying the result. One can grow a hundred bushels of 
wheat in a year by using little land and much labor or by using 
much land and little labor. Which is the more economical com- 
bination will depend upon the relative cost of land and labor. 
Where land is cheap and labor dear, it pays to use much land 
and little labor ; where land is dear and labor cheap, it pays to 
use little land and much labor. 

In an actual chemical combination the various elements have 
to be combined, apparently, in fixed proportions, without any 
variation whatever. This is known as the law of definite pro- 
portions. But in order to induce a given chemical combina- 
tion, different substances have sometimes to be mixed in 
considerable masses. This gives rise to another law, which is 
probably as well understood as the law of definite proportions. 
It is of special importance in economics. 

The law of variable proportions. Take, for instance, the 
juvenile experiment of mixing vinegar and baking soda for the 
purpose of producing a fizz. The actual combination of mole- 
cules which produces the gas that makes the bubbles doubtless 
follows the law of definite proportions. But not all the mate- 
rials in the mixture will be thus instantly combined. At the 
end of a definite period of time, say a minute, some of the acid 
and some of the soda will remain uncombined, probably be- 
cause a certain number of molecules of each never happened 
to come in chemical contact with the requisite molecules of 
the other. The greater the quantity of vinegar in proportion 
to the soda, the greater the probability that each molecule of 
the soda will come in chemical contact with a molecule of acid. 
Therefore the greater the proportion of vinegar to soda, the 
greater the proportion of the molecules of soda that will be 
used in the formation of gas and, conversely, for the same rea- 
son, the smaller the proportion of the molecules of acid that 
will be used. Increase the soda and decrease the vinegar, and 
the opposite would follow, for the same reason. 



474 PRINCIPLES OF NATIONAL ECONOMY 

Many factors at work in combination. There are, of course, 
other factors in the problem, such as the size and shape of the 
receptacle in which the mixture is placed, the temperature of 
the mixture, the amount of shaking or stirring to which it is 
subjected, as well as the time allowed for the combination to 
take place. Leaving all the other factors unchanged except the 
one selected for experimentation, we get a result similar to that 
which we obtain in some of the larger economic combinations, 
such as the application of labor to land. In fact, we are here 
in contact with a universal law which appHes to mixtures of 
chemicals, as distinct from chemical combinations, to the mix- 
ture of fertilizers in the soil, and to every other combination, 
including that of various forms of human talent in the promotion 
of national greatness. 

The manufacture of ether. In the manufacture of ethers, 
alcohol is combined with acids much as soda is combined with 
vinegar in the experiment referred to above. After the mix- 
ing has taken place, only a limited proportion of the original 
ingredients is actually combined. Since alcohol is expensive and 
the acids are cheap, it is found economical to use large quanti- 
ties of acids in order to force as much of the alcohol as possible 
to combine. The acid is literally massed in its attack upon the 
alcohol, in order that no molecule of the latter may escape. 
In fact, this phenomenon is explained by the so-called mass 
law. If alcohol were cheap and acid expensive it would be 
desirable to force every molecule of the acid to combine. In 
order that as few as possible might escape, it would be necessary 
to mass the alcohol in its attack upon the acid. An economist 
might not improperly call this an intensive use of acid and an 
extensive use of alcohol. Conversely, the rule actually followed 
of massing the acid upon the alcohol might be called an in- 
tensive use of alcohol and an extensive use of acid. It is cer- 
tainly analogous to massing large quantities of labor and capital 
upon small areas of land in order to get the maximum product 
out of the land, even though a relatively small product per unit 
of labor and capital is secured. 





B 










I 


E 






G 




H 



THE LAW OF VARIABLE PROPORTIONS 475 

The results of massing one ingredient upon another may be 
illustrated by Diagram A, which is familiar to all students of 
economics. With a given quantity of alcohol let us mix varying 
quantities of acid, which we shall represent on the line OX. The 
quantity of the product, ether, we shall represent on the line OY. 
When a quantity of acid represented by the line OC is put into 
the mixture, let us assume that we get a quantity of ether repre- 
sented by the rectangle OABC. Twice that quantity of acid 
with the same quantity of alcohol will increase the product, 
ether, but will not double it ; that is, the product increases but 
not in proportion to 
the acid. Let us sup- 
pose that a quantity ^ 
of acid represented 
by the line OF pro- 
duces, with the other 
ingredients, a quan- 
tity of ether repre- Diagram A 
sented by the rec- 
tangle ODEF. A third increment and a fourth would still 
result in some additions to the product, as long, perhaps, as 
any of the original quantity of alcohol was able to escape 
the mass action of the acid. Eventually the point would be 
reached where furt*her increases of the acid would add nothing 
to the product. 

It will be observed, however, that the addition of the incre- 
ment CF to the acid did not add the rectangle CIEF to the 
product. The addition to the product is the difference between 
the rectangle OABC and the rectangle ODEF. That difference 
is represented by the rectangle CGHF. 

The marginal product. This is technically known as the 
marginal product of the acid. This technical term does not 
mean, however, that even the product CGHF was produced by 
the acid alone ; it merely means that whatever value there is 
in the added product CGHF would be the outside limit of the 
value of the added ingredient CF. 



476 PRINCIPLES OF NATIONAL ECONOMY 

Air and gasoline in a carburetor. A problem something like 
this presents itself in practical form in the use of air and 
gasoline in an internal-combustion engine. Both are necessary, 
but they may be mixed in somewhat variable proportions. One 
may use a rich or a lean mixture. A rich mixture is one rich 
in gasoline and lean in air. A lean mixture is one lean in 
gasoline and rich in air. Combustion itself is a chemical process 
and presumably follows the law of definite proportions rather 
than the law of variable proportions. But the mixture of air 

and gasoline which 
has to precede com- 
bustion is not a chem- 
ical combination and 
follows the law of 
variable proportions ; 
^ that is to say, not all 

^ of both ingredients 

actually burns, any 



Q X more than all of the 
Diagram B ingredients in the 

manufacture of ether 
are actually combined. A lean mixture masses air on the gaso- 
line and enables more of the latter to burn, though much of the 
air is unburned ; a rich mixture does not mass so much air, does 
not burn so much of the gasoline, but burns a larger proportion 
of the air. If air were expensive and gasoline cheap a rich 
mixture would be more economical. Since air costs nothing and 
gasoline is expensive a lean mixture is the more economical. 
The leaner the mixture that can be made to explode, the greater 
the economy of gasoline. It wastes air, but that is not bad 
economy. In short, we try to adjust our carburetors so as to 
approximate as nearly as possible to the conditions represented 
in Diagram B. 

Let us assume that a quantity of acid represented by the line 
OL results, under certain conditions of manufacture, in a 
quantity of ether represented by the rectangle OJKL, while a 



THE LAW OF VARIABLE PROPORTIONS 477 

quantity represented by the line OQ results, under similar cir- 
cumstances, in a quantity represented by the rectangle OMNQ. 
But these two rectangles are equal ; that is to say, with a quan- 
tity of acid equal to OL one gets precisely the same as with OQ. 
In short, the additional acid, LQ, is thrown away. It is of no 
use whatever in that particular mixture, and yet, the acid being 
all of uniform quality, it is as good as any of the rest. The 
average product, however, for that quantity of the variable in- 
gredient would be represented by the rectangle LPNQ. It 
would be foolish to pay that much for it, however, or, if it cost 
as much as that quantity of ether would sell for, it would be 
foolish to use so much. If, however, it cost absolutely nothing 
it might pay to use that much or nearly as much in order to be 
sure of getting the full use of the alcohol, which is expensive. 

If we were to reduce the broken lines which form the tops 
of the rectangles in the two diagrams A and B to smooth 
curves, we should get something like the following : 

As we increase the 
quantity of one ingre- 
dient along the line 
OX, leaving other fac- 
tors unchanged, the 
average productivity 
( that is, the total prod- 
uct divided by the 

number of units of Diagram C 

the variable ingredi- 
ent) gradually falls ; but as long as there is any product what- 
soever there must be an average productivity per unit of that 
ingredient, this average productivity being represented by the 
descending curve YB. But the marginal productivity falls 
much more rapidly and may even become a minus quantity. 
When so much of this variable ingredient is used as to yield 
the maximum total product, and further additions add nothing 
to the total, then these further additions are said to have a 
marginal productivity which is nil. In Diagram C the marginal 




478 PRINCIPLES OF NATIONAL ECONOMY 

product of varying quantities is represented by the line YA, In 
some mixtures further additions may actually interfere with the 
work and reduce the total product. The curve YAC represents 
the marginal product under these conditions. In other mixtures 
the excess of the variable ingredient does not become positively 
detrimental or destructive, but merely neutral. In such cases 
its marginal productivity becomes nil but never a minus quan- 
tity. The curve YAC in Diagram C, in order to represent this 
class of cases, would have to be redrawn. It should never fall 
below the line OX. 

Reversing the experiment gives corresponding results. If now 
we change the experiment and introduce varying quantities 
of the other ingredient in the mixture with a fixed quantity of 
the ingredient which we have been considering as the variable 
factor, we shall get results which harmonize perfectly with 
those which we have secured hitherto. Returning to the case of 
alcohol and acid in the making of ether, let us start with a 
quantity of acid represented by the line OL in Diagram B. Ac- 
cording to our assumption, as explained earlier, that quantity 
of acid with the original quantity of alcohol produced no more 
ether than did a slightly smaller quantity of acid represented by 
the line OL. If now we mix a quantity of acid equal to OL 
with enough additional alcohol to bring the mixture to the same 
proportions as in the original mixture, in which OL acid was 
used, the product, ether, will increase in exact proportion to the 
increase in the alcohol, provided^ of course, the reaction is not 
hindered by the smallness of the receptacle or by some other 
extraneous circumstance. 

To use, for example, a fixed quantity of air for each ex- 
plosion, but a larger quantity of gasoline, would require a larger 
cylinder. Making such necessary allowances, we can say that 
if the maximum amount of air in a gasoline engine is used with 
a given quantity of gasoline, so that more air would be of no 
advantage whatever, then a little more gasoline could be in- 
troduced and would add considerably to the power. There 
being enough air in the mixture to get the maximum combustion 



THE LAW OF VARIABLE PROPORTIONS 479 

of gasoline, the power would for a time increase in proportion 
to the gasoline. As more and more gasoline is introduced, how- 
ever, with a fixed quantity of air, making the mixture grad- 
ually richer, a smaller and smaller proportion of gasoline will 
be burned because of a scarcity of air. If the mixture is made 
rich enough a point will be reached where further additions of 
gasoline will add nothing whatever to the power. The marginal 
productivity of gasoline is then nil. When the mixture gets so 
rich that it will not explode, it reduces the power, and the mar- 
ginal productivity of gasoline becomes a negative quantity. 

The marginal product of each factor the complement of that 
of the other. The marginal productivity of each factor in the 
combination is, it will be observed, the complement of that of 
the other factor. When the proportions are such that the mar- 
ginal productivity of one is nil, that of the other is 100 per 
cent of the average product ; that is, the total product increases 
in exact proportion as this factor is increased. When the pro- 
portions are such that the marginal product of one factor is low, 
that of the other is high, the sum of the two marginal products 
always equaling the total product. 

When there are more than two factors in the compound the 
problem becomes more complicated, but the principle is the 
same. In such a case it is better to treat each one separately, 
regarding all the others as a bunch, or cluster, and thus treat- 
ing them as a unit. Marshall has suggested the word ''dose" to 
designate a group of factors. Thus, if we were considering 
nitrogen, phosphorus, potassium, and all cfther factors in soil 
fertility, we could treat all the factors except, say, nitrogen 
as constants. By varying the nitrogen in the compound we get 
variations in the crop yields. 

Rothamsted experiments. Experiments of this kind have 
actually been carried on at the Rothamsted estate, near Lon- 
don, where the great work inaugurated by Sir John Lawes has 
been carried on for many years. In one experiment, for ex- 
ample, five plots of land of approximately equal fertility were 
treated alike in all particulars save one. Different quantities 



48o 



PRINCIPLES OF NATIONAL ECONOMY 



of nitrogen were applied in the fertilizer. Forty-three pounds 
were applied to one ; 86 pounds to another; 129 pounds to an- 
other; and 172 pounds to another. The following table shows 
the results : 



TABLE II 



Plot 


Fertilizer 


Average Yield 

IN Bushels for 

Eight Years 


Gain for 

43 LB. OF 
N ITROGEN 


No. 5 
No. 6 
No. 7 
No. 8 
No. 16 


Mixed minerals alone 
Mixed minerals plus 43 lb. nitrogen 
Mixed minerals plus 86 lb. nitrogen 
Mixed minerals plus 129 lb. nitrogen 
Mixed minerals plus 172 lb. nitrogen 


19 

27 1 

3Si 
36I 
2>7h 







According to this table the yields show diminishing returns 
for each successive dose of 43 pounds of nitrogen. The gain 
on Plot No. 16 over Plot No. 8 was so slight, being only five 
eighths of a bush'el, as to be obviously unprofitable. Therefore 
this plot was discontinued at the end of eight years, but the 
other four were continued for forty-eight years, with the fol- 
lowing results : 

TABLE III 



Plot 


Yield in 
Bushels 


Gain for 43 lb. 
Nitrogen 


No. 5 


15 

33 
36J 




No. 6 


9 
9 
3i 


No. 7 . . . 


* 


No. 8 





The number of plots is too small to be finally conclusive, but 
so far as they go they show interesting results. The first two 
doses of 43 pounds each (on Plot No. 6 and Plot No. 7) show 

1 These tables are presented in the excellent article by Eugene Davenport, 
in Bailey's "Cyclopedia of American Agriculture" (The Macmillan Company, 
New York) ; compare also the author's volume "Principles of Rural Economics" 
(Ginn and Company, Boston, igii), pp. 183-184. 



THE LAW OF VARIABLE PROPORTIONS 



481 



constant returns, and the third dose (on Plot No. 8) shows 
sharply diminishing returns. Allowing S6.50 as a fair price for 
43 pounds of nitrogen and $1 as a fair price for a bushel of 
wheat we get the following results : 



TABLE III 





Plot 


Yield in 
Bushels 


Gain for 

43 LB. 

Nitrogen 


Value of 
Gain 


Cost of 
Gain 


Profit or 
Loss 


No. 5 

No. 6 

No. 7 

No. 8 


15 

24 

33 
362 


9 
9 
3i 


?9 

9 
3-75 


$6.50 
6.50 
6.50 


$2.50, profit 
2.50, profit 
2.75, loss 



If the price of wheat were $2 a bushel the net gains would 
have been $11.50 on Plot No. 6, $11.50 on Plot No. 7, and $1 
on Plot No. 8. In other words, the last dose of 43 pounds of ni- 
trogen would have paid a profit of $1 instead of a loss of $2.75. 
But if the price of wheat had been 50 cents a bushel, nitrogen 
costing the same, there would have been a loss on every dose 
of nitrogen. 

Problems to be worked out. These tables present a number 
of interesting problems which the student may work out for 
himself. Taking Tables II and III as a basis, the following 
problems are suggested : 

1. With 43 pounds of nitrogen costing $6.50, at what aver- 
age price must wheat sell in order that the farmer may come 
out just even, with neither profit nor loss, on the third dose of 
43 pounds of nitrogen (Plot No. 8)? 

2. With wheat selling at $1 a bushel, at what price must 43 
pounds of nitrogen sell in order that the farmer may come out 
even on the same plot with the same application of nitrogen ? 

We may, without doing violence to language, turn about and 
speak of "applying" doses of land-plus-other-factors to nitro- 
gen. Let us start with 129 pounds of nitrogen, to which one 
plot, or dose of land-plus-other-factors, is applied, yielding (ac- 
cording to Tables II and III) 36I bushels. Adding two more 



482 PRINCIPLES OF NATIONAL ECONOMY 

plots to this combination (that is, spreading our 129 pounds 
of nitrogen over three plots instead of one) we get a much 
larger crop. Assuming that Plot No. 6 is exactly equal to 
Plot No. 8 we get 72 bushels ; that is, on Plot No. 6 one dose 
of nitrogen with one dose of land-plus-other-factors yields, ac- 
cording to our tables, 24 bushels. Three doses of 43 pounds of 
nitrogen added to three doses of land-plus-other-factors should 
give us three times as much, which makes 72 bushels. 

Since three doses of nitrogen with one dose of land-plus- 
other-factors yields 72, it follows that the adding of two doses 
of land-plus-other-factors adds 35^ bushels. 

A large number of experiments of the same kind needed. We 
have not plots enough to carry this analysis much further, but 
it is probably clear enough by this time that by varying the 
ratios in which different factors are mixed in any productive 
combination we get varying results. That being the case, any 
economist who is not willing to consider the relation of the 
variation in the factors to the variation in the product is not 
much of an economist. It must also be apparent by this time 
that the relation between the variation in the quantity of any 
factor in the combination and the variation in the product must 
have a great deal to do with determining the value of the factor. 

This method gives the key to all correct valuation. Earlier 
in the chapter the term "marginal productivity" was applied 
to the variation in the product which followed a minute varia- 
tion in the quantity of any factor in the combination. In each 
of the Tables I, II, III, the figures in the third column would 
be called the marginal product of nitrogen. Objection has oc- 
casionally been raised to the use of the word "product" in 
this sense. It is contended that even these increments of prod- 
uct are not in any sense the exclusive product of the 43 pounds 
of nitrogen which were added in order to get that increment, — 
that 43 pounds of nitrogen, alone and unrelated to the other 
factors, would not produce even the small increments of A^theat 
indicated in the third column. No one, of course, claims that 
they would or could. It is not worth while to discuss this or 



THE LAW OF VARIABLE PROPORTIONS 483 

that possible meaning of the word ^'product" or "productivity." 
The essential thing to consider is, How much could a farmer 
afford to pay for a given quantity of nitrogen to be used in 
a given combination? It is obvious that this must depend on 
the way it would affect the crop. How much more wheat could 
he grow by using more nitrogen or how much less would he grow 
by using less ? There is no question more practical than this. 
It is, moreover, a question which must be raised with respect 
to each and every factor in that combination of factors called 
a farm, or in any other business estabhshment. It is in the 
answers to such questions that we must find the key to any 
clear understanding of the problem of the distribution of 
wealth, which is, as pointed out in the beginning of this chap- 
ter, the problem of the valuation of the factors of production. 



CHAPTER XXXIV 
THE PROBLEM OF DISTRIBUTION 

How intensely is a man's labor desired ? The price of labor, 
like the price of commodities, depends upon how much it 
is desired in comparison with other things. It is important 
in discussing wages, as in discussing the price of commodities, 
that we remember that it is not labor in general, but specific 
units of labor, which are purchased. The question is not how 
intense is the need or desire for labor in general nor how great 
would be the loss if all labor were destroyed. The question 
is how intense is the need for a given number of units of a 
given kind of labor or how great would be the loss if that 
given number of units were subtracted from the total supply. 
In the case of labor, as in the case of commodities, the practical 
everyday question on the part of the prospective purchaser is. 
How much do I need this particular article or the labor of this 
particular man? How much better off shall I be with the 
advantage of his help than without it ? 

The need for more labor, rather than the absolute need for 
labor. It may be true that if there were no labor of a given 
class, say that of ditch-diggers, the community would suffer 
terribly. Nevertheless, there may be so many ditch-diggers 
that the addition of one to the total number would add 
very little to, and the subtraction of one would subtract very 
little from, the well-being of the community. When this is 
the case the labor of any one of the total number will not 
be very much desired. Would-be employers will be somewhat 
indifferent to his offers to help and to his threats to stop work- 
ing or to emigrate. The indispensable man, like the indispen- 
sable commodity, commands the high price; the man who can 
be easily spared, like the superfluous commodity, brings the 
low price. 

484 



THE PROBLEM OF DISTRIBUTION 485 

This may be called the functional theory of wages. It forms 
a part of the functional theory of value which was outlined 
in a previous chapter. The function of a high price in the 
economy of the nation is to call into existence a larger supply 
of the thing for which it is offered ; the function of a low 
price is to discourage the production and reduce the supply 
of the thing for which it is offered. If a larger supply is desired 
or needed, a high price may be offered as a means of getting it ; 
in fact, in a free country it is almost the only way. In an unfree 
country it could be commandeered or conscripted. If a larger 
supply is not desired or needed, a low price is the means of 
checking, limiting, or reducing the supply. Find out, in any 
given case, how much better off a community would be (or 
thinks it would be) if it had more of a given thing than it now 
has, and you have a fair measure of the reward which it could 
afford (or thinks it could afford) to pay in order to get more. 
Stated negatively, find out how much worse off the community 
would be (or thinks it would be) if it were to lose a unit or a 
few units of its existing supply of a given thing, and you have 
a measure of what it could afford (or thinks it could afford) to 
pay rather than to incur that loss. If it thinks it would make 
a great difference one way or the other, a high price will be 
offered ; if it thinks it would make very little difference, a low 
price will be offered. This applies to the price of labor as 
well as to the price of commodities, and for the same reason. 

In the case of labor, as in that of commodities, the com- 
munity may be sadly mistaken. It may fail to appreciate 
real merit, and it may greatly overrate certain qualities in 
either case. There is no going behind the returns in a verdict 
of this kind any more than in a popular election. Again, there 
may be members of the community who desire intensely to 
possess a certain commodity or to hire a certain kind of labor, 
but who have not the wherewithal to purchase or hire it. They 
will therefore have little influence on the price or the wages. 
This impecunious condition may be due to the fact that others 
have no great desire for the labor or the products of the persons 



486 PRINCIPLES OF NATIONAL ECONOMY 

in question. In that case the community does not value their 
services very highly^ and therefore their desires have little 
influence on the market for other things or other services. 

Productive labor is wanted because of its product. Our next 
task is to find out what determines how much the labor of any 
p%,rticular man or group of men is wanted. In the simplest 
possible case — that of a laborer who, without any help from 
anybody else, produces a complete article — his labor is needed 
just as much as and no more than the article itself is needed. 
The price of the article, then, is his reward. If he is not satis- 
fied with his income he must find fault with the price which 
the consumer pays for the product (for he gets the whole 
price) and not with the share of the product which goes to him. 
This, however, is a case so simple as to be very exceptional. 
Very few finished products are produced by the labor of a 
single person. One who goes out into the woods and gathers 
nuts or berries, carries them in vessels which he has himself 
irriprovised, and sells them directly to consumers may come 
under this class. The woodsman who goes into the primeval 
forest and chops wood will at least have an ax ; this ax is 
likely to have been made by somebody else. He will probably 
also need a team, which may have been grown or produced by 
somebody else. While it is not strictly true that in a case of this 
kind the finished product, firewood, is produced by the labor 
of one man, stillthe problem in distribution is fairly simple. 
If the woodman has paid a fair price for his ax, the question 
of distribution as between him and the ax-maker is settled and 
does not need to bother us any more. If he has likewise paid 
a fair price for his team and wagon, the problem of distribution 
as between himself and the horse-breeder and wagon-maker 
is also settled and need not bother us again. Since he has 
paid for his tools, the total value of the wood which he cuts 
and hauls to town is his reward, and there is no further problem 
in distribution. But the farther we proceed with our study, 
the more complicated the problem will become, for we shall 



THE PROBLEM OF DISTRIBUTION 487 

find that in the great majority of cases the product is the joint 
product of a large number of people. 

Goods generally produced by the joint labor of a number of 
persons. We are sometimes told that most goods are socially 
produced. This is a rather impressionistic statement; it may 
do no harm, but it is liable to misinterpretation. It would be 
better to say that most goods are produced by the joint efforts 
of several persons. The total reward which can go to all of 
them cannot in the long run exceed the total value of the fin- 
ished product in the complex cases any more than in the simple 
cases of the berry-picker and the woodchopper. This must be 
divided among all those who have participated in its production. 
The price of the loaf of bread must reward all those who have 
had any part in its production, including the baker^ the miller, 
the various transportation agencies, and the farmer, as well 
as the manufacturers of the farmer's, the baker's, and the 
miller's tools^ and so on back to the lumbermen and the 
miners who extracted the raw material out of which the tools 
were made. 

The successive division of labor and the problem of distribu- 
tion. We find here that we are in contact with what, in a 
previous chapter, has been called the division of labor. This, 
as already pointed out, is of two kinds : contemporaneous and 
successive. We have the successive division as between the 
farmer and the miller, and as between the miller and the baker, 
since, one after the other, they work upon the same material. 
We have an example of the contemporaneous division of labor 
as between the baker and his assistants, the mill-owner and his 
employees of various kinds, the farmer and his hired men, the 
railroad company and its employees, and so on. The problem 
of distributing the price of the finished product among those 
who work upon the raw material in regular succession is simply 
a problem in the price of commodities. Thus the reward of the 
farming group comes to them in the form of the price of wheat. 
This price must then be distributed among the contempora- 



48& PRINCIPLES OF NATIONAL ECONOMY 

neous workers on the farm ; that is, the farmer himself and his 
hired men. The difference between the price of wheat and that 
of flour and its by-products must furnish the total reward for 
the milling group and must be divided among them, and the dif- 
ference between the price of flour and that of the bread must 
furnish the total reward to be divided among the baking group. 

All this is fairly simple and leads to no serious social problem. 
Of course the farmer .would like to get a higher price for his 
wheat and the miller would like to get it at a lower price, and 
each one may from time to time accuse the other of trying to 
manipulate the price ; but this phase of the problem of distri- 
bution is a question of the market price of an impersonal com- 
modity, and society in general has not taken up the quarrel. 
Similarly, the miller would like to get a higher price for his 
flour, and the baker would like to get it at a lower price. This 
conflict of interests, however, is also a question of a commodity 
price, and it does not now create what is known as a social prob- 
lem. The commodity market is supposed to take care of it, 
and social reformers in general have not exercised themselves 
to any great extent on the subject. Occasionally, of course, 
someone is accused of cornering wheat or manipulating the 
price of flour. Similarly, the baker would like not only to get 
his flour cheaper but also to sell his bread at a higher price. 
This, again, is taken care of by the commodity market. 

When bakers are accused of manipulating prices, as is not 
infrequently charged by dissatisfied consumers, no great social 
problem is supposed to be created. There have been historic 
occasions, of course, when mobs of irate consumers have 
hanged bakers to their own lamp-posts because the price of 
bread was higher than the consumers liked to pay. They have 
not always stopped to consider how much the baker had to 
pay for his flour, or the miller for his wheat, or how hard a 
time the farmer had had in growing his wheat, owing to bad 
weather and pests of various kinds. All that the irate con- 
sumers realized was that the price of bread was higher than 
they were accustomed to paying, and the unfortunate baker 



THE PROBLEM OF DISTRIBUTION 489 

was the only one within their reach upon whom they could 
wreak their vengeance. 

The division of the product among contemporaneous workers 
the difficult problem. The great social problem of today, so far 
as it relates to the distribution of wealth, is the problem of 
distributing the price of the product among the contempora- 
neous workers. Of the total price of wheat, how much should 
go to the landowner (if he is a different man from the farmer), 
how much to the farmer, how much to the laborer, how much 
to the capitalist (if he is a different man from the farmer)? 
Or, again, of the total spread between the price of wheat and 
the price of flour, which furnishes the total reward to the 
milling group, how much should go to the capitalist, how much 
to the owner of the mill site, how much to the manager, and 
how much to the various types of laborers ? And so on through 
the transportation groups and the baking groups, the difficult 
problem is always that of the distribution of the total earnings 
of the group among the contemporaneous workers within it. 

What is meant by relative productivity? Not much head- 
way can ever be made in the study of this problem unless we 
hold carefully in mind the law of variable proportions as 
explained in the last chapter. When it is suggested, for ex- 
ample, that each factor of production should be paid for in 
proportion to its contribution to the product, any student who 
does not understand the law of variable proportions is likely 
to say that there is no way of finding out what each factor 
contributes. He will say, for example, that it is like trying to find 
out how much of the welding is done by the anvil and how 
much by the hammer, or how much of the cutting by the 
upper and how much by the lower blade of the scissors. To 
use this comparison is to show that one does not understand the 
problem. If one blade of the scissors were a little longer than 
the other, it would not require any so-called metaphysical or 
theoretical reasoning to see that the scissors might be im- 
proved by lengthening the shorter blade. If two workmen were 
to offer their services, one to lengthen the longer blade and one 



490 PRINCIPLES OF NATIONAL ECONOMY 

to lengthen the shorter blade, it would not take much of a 
theoretician to decide which workman it would be better to 
hire. The workman who would lengthen the shorter blade 
would add somewhat more to the cutting-power of the scissors 
than the workman who would lengthen the longer blade. If 
blacksmiths all had anvils enough but were short of hammers, 
or had hammers enough but were short of anvils, they would 
know perfectly well which to buy. In the one case the seller 
of hammers, in the other the seller of anvils, would get their 
money. 

Most economic problems, as pointed out many times al- 
ready in this volume, relate to the problems of more or less, 
of improvement or deterioration, of readjustment of existing 
equipment, organization, etc. If the blacksmith were ever 
called upon to decide whether to get along with an anvil with- 
out any hammer,, or with hammers without any anvil, there 
might be some point to the comparison. The question which 
he has to decide is how to balance his equipment so as to 
have hammers and anvils well adapted to one another. If he 
were to find that he could improve his work slightly by 
having another hammer, but that he could gain nothing by 
buying another anvil, there is not much doubt that he would 
be more likely to spend money on hammers than on anvils. 
He would not spend much time puzzling over the abstract 
question as to whether hammers or anvils are the more pro- 
ductive. Similarly, if a farmer found that he could increase 
his crop more by having extra help than by having more land, 
he would be more likely to offer wages to someone than to 
offer rent to someone else. If farmers generally felt that way 
about it, wages would be high and rent low. Under the oppo- 
site conditions rent would be high and wages low. 

Diminishing returns from land. Under the law of variable 
proportions, or that special phase of it known as the law of 
diminishing returns from land, it is actually found that in a 
community where there is an abundance of good land but a 
scarcity of labor to work it, one or more laborers added to 



THE PROBLEM OF DISTRIBUTION 491 

the existing number make a considerable difference in the 
crop. That is a sufficient reason for paying high wages to 
labor. Additional laborers are very much needed ; the agri- 
cultural situation would be very much improved by having 
more laborers and very much injured if any were lost. The 
question of more laborers or of fewer laborers is one of 
considerable importance. 

On the other hand, where land is so abundant and laborers are 
so few that it is difficult to cultivate the existing land, it would 
not be of much advantage to production to have a few more 
acres nor much of a disadvantage to have a few less. The 
question of more or less is not, in this case, very important. 
This is the question which presents itself to the practical 
farmer. The question as to which is absolutely more important, 
land or labor, is one which occurs only to armchair philoso- 
phers. This would be in all respects like the question as to 
which does more of the cutting, the upper or the lower blade 
of the scissors. 

Shares generally divided into wages, rent, interest, and profit. 
It simplifies the problem somewhat to classify those who take 
part in the contemporaneous division of labor according to 
the functions which they are supposed to perform. It is cus- 
tomary to divide them into four main classes. The first class is 
made up of the laborers, who work either with their hands or 
with their heads and receive their share in the form of wages or 
salaries (for the sake of simplicity, salaries are in this chapter 
included under wages) ; the second class is made up of the land- 
owners, who furnish the land and receive rent ; the third class 
is made up of the capitalists, who supply the capital and 
receive a reward in the form of interest ; and the fourth class 
is made up of the independent business men, who undertake to 
assemble all the other factors, — who take the chief risks of the 
enterprise and receive whatever is left over after all the others 
are paid, calling it profits. 

Several functions sometimes performed by the same man. 
Any or all of these functions may be performed by, and any or 



492 PRINCIPLES OF NATIONAL ECONOMY 

all of these shares may go to, the same man. In many small 
enterprises the independent business man does his own work 
and is therefore a laborer, owns his own land and is therefore 
his own landlord, and furnishes his own capital and is therefore 
his own capitalist. A very large proportion of the total business 
of the nation is done in this way. The typical farm in the 
northern half of the country comes under this description, as do 
also many small shops and stores in country towns and a few 
even in the larger cities. But even the farmer, as well as any 
other business man who does a part of his own work, may hire 
additional help and pay wages, though getting wages for him- 
self. He may also rent additional land, though owning some 
land of his own and getting rent for it. He may borrow addi- 
tional capital, though owning some capital of his own and get- 
ting interest on it. In fact, we can find every possible variation, 
from the enterprise where every function is performed by the 
same man to that where no one performs more than a single 
function. An example of the latter would be the enterprise 
where laborers do all the work and receive nothing but wages 
or salaries ; where someone else is the landowner, furnishing 
nothing but land and receiving nothing but rent ; where another 
man or group of men furnishes nothing but capital and receives 
nothing but interest ; and where still another man or group of 
men assumes the risks of the enterprise, invests the borrowed 
capital on the rented land, hires the labor, buys the raw mate- 
rials, and undertakes to find sale for the finished products. 
Labor, land, capital, and business management are commonly 
called the factors of production. There are, as a matter of fact, 
many kinds of labor, each kind performing a special function, 
and also many kinds of land, capital, and management ; but it 
would be very inconvenient to carry on a discussion if we 
attempted to name each and every kind. Therefore it is cus- 
tomary to speak of only four factors of production. 

How important is any factor of production ? We may say in 
general that when one factor of production is oversupplied 
in proportion to the others which need to be combined with it, 



THE PROBLEM OF DISTRIBUTION 493 

the question of getting more of it or even of maintaining 
the existing supply becomes unimportant. Accordingly not 
much will be paid in order to get more of it or even to hold 
the existing supply. But when any factor is undersupplied 
in proportion to the others which have to be combined with it, 
the question of getting more of it or of holding the existing 
supply becomes very important. Accordingly, a high price 
will be offered for it. 

This principle applies not simply to labor, land, capital, and 
management but to the different kinds of each. If there is a 
scarcity of skilled labor in proportion to the unskilled labor 
which has to be combined with it, it becomes very important 
to get more skilled labor or at least to keep the existing supply. 
In that case a high wage will be offered for skilled labor. 
Under the same conditions there is, of course, a large supply of 
unskilled labor in proportion to the skilled. It is therefore 
not very important that there should be more unskilled labor 
nor even that the existing supply should be kept from dimin- 
ishing. Additional unskilled laborers, under these conditions, 
add very little to the physical product, and the loss of a few 
would subtract very little. Not much is likely to be paid, 
under such conditions, for unskilled labor unless by philan- 
thropic persons. The next question is, What determines the 
relative supply of the various factors of production? The 
relative shares of the total which will go to each factor will 
depend mainly on how they are balanced in the productive 
process. The factor which is scarce relatively to the oppor- 
tunities for its advantageous use in combination with the others 
will command a large share; the factor which is abundant 
relatively to the opportunities for its advantageous use in 
combination with the others will command a small share. 



CHAPTER XXXV 

WHAT DETERMINES THE RATE OF WAGES? 

Causes of differences of wages in different occupations. Let 

us consider, first, the causes of the difference of wages in dif- 
ferent occupations. If in order to get efficient production it is 
found necessary to have a high degree of speciahzation, many- 
different kinds of skill will be found in the same establishment, 
each kind contributing its share toward the production of the 
same product. Men possessing these different kinds of skill 
will be needed in slightly variable but fairly definite propor- 
tions. In the production of cloth, for example, spinners and 
weavers will be needed in fairly definite proportions. If by 
any accident it could happen that for a period of time there 
were more spinners than were necessary to supply yarn for 
the weavers, the value of each spinner would be considerably 
reduced. Under these conditions, if they could exist, it would 
be literally true that a few less spinners would be little loss, 
provided the remaining spinners could still supply all the yarn 
the weavers could use. On the other hand, the labor of each 
weaver would be of considerable value. 

Since there would not be weavers enough to use all the yarn 
that could be produced, one less weaver would reduce the total 
production of cloth, and one more weaver would add to the 
total production, assuming that machinery and room were avail- 
able. Under these conditions there would grow up in any free 
community a difference in wages in favor of the weavers and 
against the spinners. This would be called the law of supply 
and demand. This law, however, rests upon certain funda- 
mental advantages and disadvantages, sometimes of a physical 
nature and generally independent of the social system or the 

494 



WHAT DETERMINES THE RATE OF WAGES? 495 

form of business organization. The addition to the total output 
of cloth which would result from an increase in the number of 
weavers would really be much greater than the addition which 
would result from an equal increase in the number of spinners. 
This would be a sufficient reason why a higher price should be 
offered for the labor of weavers than for that of spinners. In 
the absence of compulsion this would be the only way of 
attracting more weavers and fewer spinners. 

Of course this condition would soon correct itself. If the 
wages of the weavers were allowed to go up and the wages of 
the spinners to go down, some of the spinners would have an 
excellent reason for changing their occupation. If they could 
not easily do so the oncoming generation of laborers, who have 
to choose between the occupation of weaver and that of spinner, 
would be attracted into the one where the wages were higher, 
and thus restore the equilibrium. But if wages were not al- 
lowed to readjust themselves and, through some compulsion 
on the part of the government or some other agency, all 
mills were forced to pay as high wages for spinners as for 
weavers and to hire all who applied, then there would be no 
reason why the oncoming generation should go into the occupa- 
tion where they were most needed. They would simply choose 
the one where the work was most agreeable. There is there- 
fore a genuine social utility to be achieved by the difference of 
wages which would grow up under the law of supply and de- 
mand. It would tend to attract laborers into the occupation 
where more men were needed and to discourage them from 
entering the occupation where more men were not needed. 
This will be found to be the fundamental reason why wages 
are as a matter of fact higher in some occupations than in 
others. Where the ordinary processes of bargaining are not 
interfered with, wages tend to be high in those occupations 
where more men are needed, and needed badly, and low in 
those occupations where more men are not needed, or not 
needed seriously. The function of these differences of wages is 
to restore the equilibrium between different occupations. 



496 PRINCIPLES OF NATIONAL ECONOMY 

Cost of acquiring skill. If there is some permanent obstacle 
in the way of a free choice of occupations, there may be a per- 
manent difference in the wages in different occupations, based 
upon an undersupply of labor in one and an oversupply in an- 
other. If, for example, a certain occupation requires a kind 
of skill which is not widely distributed or easily acquired, 
whereas another occupation requires a kind of skill which mul- 
titudes of people possess or can easily acquire, there is likely 
to be a permanent undersupply of the one kind of labor and a 
permanent oversupply, at least relatively, of the other. The 
cost of training or the difficulty and irksomeness of the neces- 
sary study and practice will serve to limit the number of people 
who succeed in entering the highly skilled occupations. 

In this respect the cost of acquiring the necessary skill acts 
very much as does the cost of producing a material commodity. 
As the price of the material commodity must be high enough 
to cover the cost or to overcome the disinclination to the work 
of production, so the wages of labor in a highly skilled occupa- 
tion must be high enough to serve as an inducement to the 
labor and study necessary to acquire the skill or to overcome 
whatever disinclination there may be to the preliminary work 
of study and practice. If this cost is high the wages must be 
correspondingly high ; if the cost is very low, so that prac- 
tically no one is deterred from entering the occupation, the 
wages will be correspondingly low. 

Some skill is absolutely limited. There may, however, be cer- 
tain kinds of skill which are so scarce as to be almost inca- 
pable of being increased. Certain kinds of work may require a 
man of genius rather than a man of mere training. But in most 
cases it will be found to be a matter of training. An indefinite 
number of men could be trained for almost any occupation 
if the wages were only high enough to furnish a sufficient in- 
ducement. This, however, will depend somewhat upon the 
opportunities for education and training. Under a system of 
free public education the cost of training is greatly reduced 
and should naturally greatly increase the supply of highly 



WHAT DETERMINES THE RATE OF WAGES? 497 



skilled labor. Where the money cost of education is eliminated, 
the only cost remaining is the irksomeness of hard study. Those 
to whom this irksomeness is very slight will naturally be at- 
tracted into the more highly paid occupations. There may, 
however, be artificial restrictions in the way of entering cer- 
tain well-paid occupations. If a group of laborers in one of 
those few occupations where something resembling the ap- 
prenticeship still prevails should limit the number of appren- 
tices, that would of course limit the number of laborers who 



Causes 

OF THE 

Scarcity 
OF Labor 



In the unskilled, 
trades 



Disinclination to 
work because ■{ 
of 



In the skilled 
trades 



r Fatigue 
Long hours 

Loss of opportunity for 
pleasure 

Disinclination to f A high standard of living 
multiply be- -I Late marriages 
cause of [ Birth control 

f Women 
Exclusion of <: Children 

[ Men of other races 
Restriction of immigration 
Encouragement of emigration 

rWar 
Destruction of life through^ Pestilence 
[ Famine 
' Rarity of genius 
Expenses of education 
Disinclination to study 
Reduction of number of apprentices 
Closed shop 



could acquire skill enough to follow the occupation. In other 
cases the policy of the closed shop might be carried to such 
an extreme as to reduce the supply of labor in the given occupa- 
tion and thus prevent the readjustment of the supply of labor 
to the demand. The tendency of freedom, however, is to en- 
courage the automatic readjustment of the supply of labor to 
the demand. 

These are the principal factors which determine the excess 
in wages of the skilled trades and occupations and the learned 



498 PRINCIPLES OF NATIONAL ECONOMY 

professions over and above those paid in what are known as 
the unskilled occupations. By an unskilled occupation is 
meant, however, one which requires a kind of skill which prac- 
tically everybody can acquire without much special study. 
There is skill involved in the handling of a spade or a wood- 
man's ax, as any inexperienced person will find if he tries to 
use one or the other effectively, but it is a kind of skill which 
large numbers of people acquire easily, and therefore the supply 
of such skill is so great as to keep wages down to the unskilled 
level. We have, therefore, the problem of finding out what 
determines the wages of this general mass of unskilled labor. 
What is there here which corresponds to the cost of producing 
a material commodity or to the cost of acquiring the skill re- 
quired in one of the well-paid occupations ? The factors which 
take the place of cost of production here are, first, the disin- 
clination to work and, second, the disinclination to multiply. 

Scarcity of unskilled labor. Among the vigorous European 
and American stocks the disinclination to work is not so very 
great. Nevertheless, there is an appreciable quantity of labor 
which is chronically withdrawn from productive .work by rea- 
son of this factor. That part of the leisure class which is made 
up of people who have inherited, acquired by marriage, or 
otherwise come into possession of sufficient wealth to enable 
them to live without work shows this disinclination rather 
clearly. There are also the chronic ■ loaf ers, the tramps, and 
the nomadic element among us, who show a strong disinclination 
to work and do so only under strong temptation. 

The disinclination to multiply is unfortunately strongest 
among those who possess the most forethought. Those who 
live only in the present, who have no regrets for yesterday and 
no fears for tomorrow, generally give way to their primal im- 
pulses and multiply almost as rapidly as is physiologically pos- 
sible. Those, however, who look to the future, not only of 
themselves but of their children, who foresee the disadvantages 
which their children will suffer if they are insufficiently 
nourished or inadequately educated, generally have smaller 



WHAT DETERMINES THE RATE OF WAGES? 499 

families than are physiologically possible. The multiplication 
of numbers among such people becomes in part a moral process 
instead of a purely animal process. Family-building takes the 
place of spawning. Marriages of those who take thought for 
the future are postponed until they are able to support and 
educate their children. 

The standard of living. The group of motives and factors 
which serve to hold the procreative instincts in check is 
generally known as "the standard of living." This is a some- 
what technical term in economics and requires some care- 
ful explanation. Technically the term ''standard of living" 
means the number of desires which, in the average person 
of the class in question, take precedence over that group of 
desires which result in the multiplication of numbers. For 
purposes of discussion we will call the latter group of desires 
the domestic instincts. When the domestic instincts act power- 
fully and without opposing motives sufficient to hold them in 
check, the individual will undertake the support of a family be- 
fore he is assured of a sufficient income to satisfy any but the 
most elementary desires. Under these conditions he is said to 
have a low standard of livirig. In his case there are very few 
other desires which take precedence over the domestic instincts. 
The individual of whom that is true will accordingly marry 
and undertake the support of a family as soon as he has suf- 
ficient income to satisfy that other small group of desires. In 
other cases a large number of other desires take precedence 
over the domestic instincts. An individual of whom this can 
be said will not marry and undertake the support of a family 
until he feels reasonably certain of being able to satisfy all 
these other desires. He is said to have a high standard of 
living ; that is, an expensive standard. 

If we can imagine a community to which immigrants from the 
outside do not come and in which the average unskilled laborer 
has a high standard of living, we shall have a community 
in which the average laborer will not marry and undertake the 
support of a family until he is sure of wages high enough to 



500 PRINCIPLES OF NATIONAL ECONOMY 

satisfy a large number of desires. If the average individual, 
however, has a low standard of living he will marry and under- 
take the support of a family on low wages ; that is, wages that 
are just high enough to secure him the means of satisfying a 
small group of desires. If the unskilled laborers of the com- 
munity have a high standard of living the average age of mar- 
riage will be a little higher and the average size of the family 
a little smaller, so that the rate of multiplication will be 
materially slower than would be the case if they had a low 
standard of living. The rate of multiplication being slower, the 
oncoming supply of labor is less, and in the succeeding genera- 
tions laborers will thus be able, through the smaller supply, to 
continue to get high wages. If wages are low to begin with 
they will refuse to marry or will defer marriage to such a late 
age as to reduce the supply of labor and thus force wages up 
to a level which will enable them to maintain their standard. 
If the standard of living, however, is low and the rate of mul- 
tiplication correspondingly high, wages tend to continue low. 
Even if wages are temporarily high, unless the standard of 
living should rise quickly, the rate of multiplication will so 
increase through early marriages and large families as to over- 
supply the labor market and force wages down again until they 
are just sufficient to maintain the low standard of living. 

Standard of living affects the price of labor as cost of produc- 
tion affects the price of a commodity. From the foregoing dis- 
cussion it will be seen that the standard of living affects the 
wages of the general mass of unskilled labor in precisely the 
same way as the cost of producing a material commodity affects 
its price. Wages must be sufficient to overcome the disinclina- 
tion to marry and produce families. This disinclination, how- 
ever, is the joint product of a number of conflicting desires. 
In an elementary sense there is a strong inclination to marry 
rather than a disinclination, but the inclination to marry is 
held in check by the desire of the individual for consumers' 
goods of his own. If he realizes that with a family to support 
he will have a little less money to spend on himself, or that 



WHAT DETERMINES THE RATE OF WAGES? 501 

if his family is too large he will have less for each one of them 
and may not be able to educate them, such considerations will 
create a disinclination which may more than balance the in- 
clination toward marriage. A real safeguard against low wages, 
therefore, is a high standard of living, which will check some- 
what the tendency toward early marriages and large families. 
How far this should go is always a serious question. No one 
advocates so low a standard as would cause multiplication to 
take place as rapidly as is physiologically possible. If that 
were the case marriages would take place at the age of puberty, 
and women would be continually engaged in the functions of 
motherhood as long as childbearing was possible. Nobody 
would favor that. Everybody favors some kind of standard 
of living and some postponement of marriage. It is only a 
question as to how high a standard and how much postponement 
is desirable. 

The law of population. This brings us to the great law of 
population, which has generally been associated with the name 
of Malthus. The law which Malthus worked out and which 
has never been successfully refuted, though many attempts 
have been made, may be briefly stated as follows : 

1. Every species of plant and animal has the physiological 
power to multiply faster than its means of subsistence will 
permit. Subsistence is the factor which actually limits numbers. 

2. The physiological power of human increase is also so 
great that if it should operate without moral or social restraints 
of any kind, it would carry population to such limits that 
vice or misery or both would begin to thin out the surplus 
population and thus operate as a check upon further increase. 

3. Owing to the law of diminishing returns, a larger number 
of people cannot, in any given state of civilization and the in- 
dustrial arts, be so well provided for from the produce of a 
restricted area of land as a smaller number can. 

4. There is a strong natural instinct which inclines the mem- 
bers qf our species to the multiplication of numbers, and unless 
this is counteracted by other motives, it will lead to an increase 



502 PRINCIPLES OF NATIONAL ECONOMY 

of population beyond the limits within which comfortable 
subsistence is possible. 

5. This natural instinct is, however, opposed and held in 
check by several contrary motives, not the least important of 
which is the desire for the goods which one has been accus- 
tomed to consume, coupled with the perception on the part of 
each head, or would-be head, of a family that a larger number 
of children means a smaller share of the necessaries, comforts, 
and luxuries of life for each one; and this keeps the rate of 
increase far below that which is physiologically possible. 

6. How rigidly the increase of numbers is held in check by 
this motive depends upon people's ideas as to what is essen- 
tial, in the way of incomes, to their happiness, — in other 
words, upon their standard of living. It is the standard of 
living, therefore, which determines the rate of increase of pop- 
ulation, given the amount of wealth and the possibilities of 
production. It plays the same part in determining the supply 
of labor which the cost of producing commodities plays in 
determining their supply. 

Refinement of the law of population. While this general law 
has never been successfully refuted, and is accepted by every 
economist of any standing, some refinements have been found 
necessary. For example, it makes a great deal of difference in 
what stratum of society the increase in population takes place. 
There might be such a thing as a considerable increase in the 
total population that would result in a considerable increase in 
the rate of wages of unskilled labor. If we could double or 
treble or quadruple the number of people in what are known 
as the employing classes (that is, the professional men and, 
more particularly, the successful entrepreneurs and independent 
business men), the competition among these business men 
would take several forms. In order to equip and man their 
establishments they would have to bid against one another to 
get labor and also to sell their products. This would tend to 
bring up the price of labor and to bring down the price of 
products, — in other words, to leave a narrower margin of 



WHAT DETERMINES THE RATE OF WAGES? 503 

profits on which business men would have to live. For example, 
recent immigrants into the Philippine Islands from America 
have not been unskilled laborers but skilled laborers, engineers, 
technicians, and business men. This has added somewhat to 
the population of the Philippines, but at the same time it has 
increased the demand for unskilled laborers and has therefore 
tended to improve their condition. Whether the increase in 
the higher economic grades comes through immigration of these 
grades, a higher birth rate among the educated classes, or better 
systems of education, the results are much the same. 

Effect of immigration. We began our discussion of the 
effect of the standard of living by assuming a country to which 
no immigrants came. However high the standard of living of 
the native laborers or however strong the tendency of the edu- 
cational and social system to raise the standard of living, if 
large numbers of immigrants with a low standard kept coming 
in, it would keep the standard down to a low level. At any rate 
the oversupply of unskilled labor would tend to keep wages 
down. Their coming would tend to make business conditions 
easier for men who need to employ unskilled labor, but to make 
conditions very much harder for the unskilled laborers who are 
already there. If, however, the immigrants resemble those 
Americans who go to the Philippine Islands (that is, if they 
belong to the skilled, the professional, and the employing 
classes), they tend to make conditions easier for the unskilled 
laborers but harder for the skilled, the professional, and the 
employing classes who are already there. 

Noncompeting groups. This brings in the principle known 
by various names, such as the principle of noncompeting groups 
or that of joint demand. In the case of material commodi- 
ties it sometimes happens that two or more articles have 
to be combined to supply the same demand, — such as sugar 
and cranberries, bread and butter, etc. If sugar is so scarce 
and so high that people cannot afford to buy it, there will be 
less demand for cranberries; but if sugar is abundant and 
cheap, so that everybody can afford to buy it, there will be 



504 PRINCIPLES OF NATIONAL ECONOMY 

an increased demand for cranberries. In the field of produc- 
tion we get much better illustrations than in the field of con- 
sumption. It frequently happens that several different kinds of 
material have to be combined in the making of a single prod- 
uct, — coal and iron ore, for example, in the making of steel. 
If coal were scarce and very expensive, and other kinds of fuel 
Hkewise, the best iron ore in the world would be of very little 
use and would have to sell, if it sold at all, at a very low price. 
With cheap and abundant coal the value of ore beds tends to 
rise. The same principle applies to different types of labor. 
Managerial skill, technical skill, and manual labor have to be 
combined in the production of many manufactures. If there 
were no manual labor to be had, managerial skill and technical 
skill would be of very little use ; with an abundant and cheap 
supply of manual labor these other forms of skill become 
enormously valuable to their possessors. Conversely, with no 
managerial and technical skill to go with it, manual labor would 
be worth very little in our industries ; with an abundance of 
managerial ability and technical skill large quantities of man- 
ual labor can be utilized and many industries can start. The 
first and most important refinement to be made in the doctrine 
of population, therefore, is to point but that the question of 
absolute number is not the only question involved, — that the 
question of the occupational distribution of numbers must be 
taken into account. When the increase in numbers takes place 
among the unskilled laborers, it works to their disadvantage but 
to the advantage of those who belong to noncompeting groups, 
say the technically skilled and those possessing managing 
ability; but when the increase in numbers takes place in the 
higher economic classes, it works to the advantage of the 
unskilled laborers. 

Summary. The discussion thus far may be summarized 
as follows : 

I. The wages of any person will depend upon how much his 
labor is desired. The wages of any class will depend upon how 
important it is thought to be that there should be more laborers 



.WHAT DETERMINES THE RATE OF WAGES? 505 

of that class, or that there should not be any less. High wages 
indicate a strong desire and low wages indicate a weak desire 
to have more of a certain kind of work done. 

2. Different kinds of labor usually have to be combined in 
fairly definite but somewhat variable proportions. If there 
happens to be more of a certain kind than will combine satis- 
factorily with the existing supply of the other necessary kinds, 
the oversupplied kind will not be strongly desired. There will 
be no great need for more of it and therefore no strong reason 
for paying high wages. The kind of labor, however, which is 
undersupplied will be much more needed. There will be a 
strong reason for desiring more of it, and the only way, in a 
free society, to get more of it is to offer high inducements. 
High wages are a powerful inducement. 

3. Labor which requires a kind of skill that is difficult to 
acquire will usually be scarce, relatively to the need for it. 
Wages must be high enough to induce men to make the 
necessary effort in order to fit themselves for the work. 

4. Unskilled labor is usually abundant, being limited only by 
the disinclination to work and the standard of living or the cost 
of bringing up children. Where the cost is high, or the un- 
willingness great, wages must be high enough to induce men to 
marry and bring up children. When the cost is low and there 
is very little unwillingness to overcome, wages may be low be- 
cause men will bring up children on very low wages and thus 
keep the supply of labor intact. 



CHAPTER XXXVI 
THE ORGANIZATION OF LABORERS 

Comparative advantages in bargaining. It has long been 
recognized that in the ordinary bargaining process between 
laborers and their employers, the laborers are at a disadvan- 
tage. The reasons why they are at a disadvantage have been 
variously stated. It is argued, for example, that the capitalist 
can wait longer than the laboring man, and thus wear the labor- 
ing man out and force him to give in and accept the capitalist's 
terms. The capitalist, it is said, having an accumulation of 
wealth, can live on that accumulation. There is doubtless 
something in this argument, though it is easy to exaggerate it. 
If the capitalist's accumulation is in the form of buildings and 
machinery, it is difficult to see how he can live on these things. 
He might borrow money on the basis of the security which they 
furnish, and with this borrowed money buy consumers' goods. 

It is not so much the fact that he is a capitalist as it is the 
fact that he has greater borrowing facilities that gives him this 
advantage. If instead of owning capital he owned consumers' 
goods in considerable quantities, — if he owned, for example, 
his own house, if he had insurance policies or deposits in the 
savings bank, — he would have the same or even greater waiting 
power than he has when he owns capital of equal commercial 
value. It is therefore frequently argued that one remedy for 
this situation is for the laborer himself, as far as possible, to 
acquire his own home, life-insurance policies, and deposits in 
savings banks. This would help, at any rate, to give him the 
power to wait and would thus help to even up the advantages 
in bargaining. But the objection to this is the simple observed 
fact that the laborers have less property of any kind than their 
employers ; otherwise they would not be laborers. This being 

So6 



THE ORGANIZATION OF LABORERS 507 

the fact, it does not help much to point out what the laborer 
might do if the facts were otherwise. 

Another reason given for the disadvantage of the laborer in 
the bargaining process is that he is usually less skillful in the 
matter of bargaining than his employer. His expertness is more 
Hkely to consist of manual skill than of skill in bargaining. The 
entrepreneur is peculiarly a bargaining person. He literally 
bargains for everything. If he borrows capital, if he rents land, 
if he buys raw materials, secures transportation rates, and hires 
labor, or organizes a selling department, — every part of his 
work has to do with bargaining. He becomes, therefore, the 
bargainer par excellence. Those whose expertness lies in other 
directions are therefore at a disadvantage when they come 
to deal with him. This argument is undoubtedly correct as far 
as it goes. 

Employers are few, but laborers are numerous. The third 
fact, however, which sometimes militates to the disadvantage 
of the laborer and the advantage of the employer is that 
laborers are sometimes numerous and employers are few. 
Where this is the case there is more competition among laborers 
for jobs than among employers for men. Wherever this fact 
does not exist, there is no great advantage on the part of the 
employer. One conspicuous example would be that of domestic 
servants. The employer in this case doubtless has more power 
to wait than the maid. The employer may, on the average, be 
somewhat more intelligent than the maid. Nevertheless, he has 
no great advantage in bargaining, for the simple reason that 
there are approximately as many employers as there are em- 
ployees. Observation seems to show that, in this country at 
least, it is far more difficult for an employer to find a maid than 
for a maid to find an employer. When they meet to arrange 
terms, there is no visible advantage on the side of the em- 
ployer or disadvantage on the side of the employee. In fact, it 
sometimes appears that the advantage and disadvantage are of 
the opposite kind. There is at least a reasonable number of 
cases where the employee is very independent and must be 



5o8 PRINCIPLES OF NATIONAL ECONOMY 

placated by an almost obsequious attitude on the part of the 
employer. A multitude of other illustrations might be given, 
which in the aggregate seem rather important, though as com- 
pared with the number of cases where the employer is at an 
advantage and the employee is at a disadvantage they are prob- 
ably insignificant. Nevertheless, one can safely say that 
wherever laborers are few as compared with the number wanted, 
their bargaining power is great, their wages high, and their 
conditions satisfactory. 

It appears, therefore, that the fundamental and permanent 
remedy for the laborer's disadvantage in bargaining would be 
such a reduction of the number of laborers and such an increase 
of the number of employers as would give the labor at least an 
equal advantage in the bargaining process. This remedy, how- 
ever, like all fundamental and permanent remedies, is slow and 
difficult to bring about. It is slow in the sense that it would 
take a generation or so to bring it about; it is difficult, not 
for economic but for political and social reasons. Economically 
it is perfectly easy ; politically it is difficult simply because it 
would be difficult to get a majority of the voters to vote for 
such a policy. It might take several generations before a ma- 
jority vote could be secured for a constructive policy of this 
kind. Meanwhile the existing laborers would still be at a 
disadvantage and in need of relief. It would be cold comfort 
to them to point out that future generations of laborers may 
be exceedingly well off if the right policy is adopted. There- 
fore they are inclined to take matters into their own hands 
and adopt a more speedy remedy, even though it be less funda- 
mental and less permanent. 

Collective bargaining. This remedy is that which is known 
as collective bargaining as against individual bargaining. In 
a trade where laborers are oversupplied, each individual 
laborer is in a weak position because he can easily be spared. 
He is almost superfluous; he is certainly not indispensable. 
If he stops working or leaves the community he will scarcely 



THE ORGANIZATION OF LABORERS 509 

be missed. Industry will go on approximately as well without 
him. Because there is a superfluity of labor his place can easily 
be filled. Under such conditions his bargaining power is very 
weak; he is practically compelled to take whatever terms are 
offered to him. His kind of labor as a whole, however, may be 
absolutely indispensable. While he as an individual could 
be spared without much inconvenience, the members of his 
trade are absolutely indispensable, when considered as a whole. 
If they were all to stop work, business would have to stop ; 
if they were all to emigrate, the whole business in which they 
were engaged would be permanently destroyed. 

The group may be indispensable, while the individual could 
easily be spared. The fundamental principle involved in the 
trade-union policy of the present is the substitution of the in- 
dispensable group as a bargaining unit for the dispensable 
individual. Since the group as a whole is indispensable to in- 
dustry, if they can bargain as a whole the laborers are in a 
strong position. As a group they cannot possibly be spared. 
The difficulty, however, has always been to hold the group to- 
gether and get them to bargain absolutely as an indispensa- 
ble group and to refrain from making individual bargains 
independently of group action. 

The trade union. This underlying principle has given rise 
to one of the largest social movements of modern times; 
namely, the organization of laborers. Several types of organi- 
zation, however, have entered the field, and there is still some 
rivalry among them. In the first place, there is the trade 
union pure and simple ; this is an organization of the men who 
ply the same trade (that is, the men whose work is of the 
same kind). The Brotherhood of Locomotive Engineers is an 
example of this kind of organization. 

The industrial union. In the second place, there is the indus- 
trial union, which includes all the laborers plying various trades 
who are engaged in the same general line of industry. The 
United Mine Workers of America is one example of this type 



Sio 



PRINCIPLES OF NATIONAL ECONOMY 



of organization; the Brotherhood of Railroad Trainmen of 
America, which attempts to take in all the railroad workers, 
is another. 

The labor union. A third type of organization is what may 
be called the labor union, which attempts to organize all 
laborers, of whatever trade or occupation and in whatever in- 
dustry they may be engaged. The Knights of Labor were an 
organization of this type, and lately the Industrial Workers of 
the World have attempted a similar type of organization. 

The federation of trade unions. The trade union seems in 
recent years to have been somewhat stronger than either the 
industrial union or the labor union, but it has felt the need of 
some larger and more nearly universal type of organization. 
This has been secured by the federation of trade unions into a 
national organization known as the American Federation of 
Labor. This type of organization recognizes that each trade 
has certain special and peculiar interests of its own and there- 
fore has a special reason for organizing as a trade. This is a 
principle which seems to be ignored by the labor union espe- 
cially. By organizing the special and peculiar interests of 
each trade the federation becomes stronger at this most vital 
point. By federating the different trades for the furthering of 
the interests which are common to all it becomes stronger at 
another important point; namely, with respect to the need 
of concerted action on a nation-wide scale. 

The attempt to ignore the special interests of each trade and 
to unite all workers, of whatever trade or industry, into one 
universal, undifferentiated organization has had certain ideal- 
istic features which make a strong appeal to men of idealistic 
temperament. There is the attempt to ignore any possible 
rivalry of interests among different classes of laboring men. 
While this sounds attractive it hardly accords with the ob- 
served facts. It is perhaps a little more humanitarian in its 
philosophy but a little less effective in its methods of work. It 
might be compared to an attempt to create a unified nation by 
ignoring all Joed JBterests and internal conflicts, whereas the 



THE ORGANIZATION OF LABORERS 511 

federation idea might be compared to a system of government 
which would recognize local and state interests and allow a cer- 
tain amount of self-government to the local units, but which 
would unite them all under a national government for the 
carrying out of national aims. 

Necessity of controlling the supply of labor in its own market. 
As in all attempts in all fields to bargain to better advantage 
for the sale of either a commodity or a service, an organization 
of laborers must get control of the supply of the service which 
it is trying to sell. This leads to the policy of the closed shop ; 
that is, the policy under which none but members of the organi- 
zation are to be employed in a given shop or series of shops. 
If any considerable number of outsiders are permitted to work 
in these shops, they will of course bargain independently and 
be in a weak position. That very fact ariso tends to weaken 
the power of the organization in the bargaining process. Unless 
the organization can control the supply of labor which is per- 
mitted to work in a given trade, — can withdraw them as a body 
or put them back as a body, — it will find itself unable to secure 
advantageous terms. If, for example, there were so many non- 
union laborers available as to make the employer more or less 
indifferent as to whether the members of the union worked as a 
body or withdrew as a body, he would not be likely to pay much 
attention to the demands of the union. If he knew that, even 
though the union as a body withdrew from his shop, he could 
easily fill places with nonunion men the bargaining power of 
the union would at once be destroyed. 

The closed shop. An absolutely closed shop is very difficult 
to maintain when there is a surplus of laborers available for a 
given occupation. So long, for example, as indefinite numbers 
of foreign-born laborers can be had for the recruiting of the 
ranks of any trade, nothing but the most drastic measures on 
the part of the organization of laborers can preserve its control. 
It is sometimes necessary, from their point of view, to use a 
good deal of persuasion, and this persuasion is sometimes of a 
rather severe nature and often virtually amounts to compulsion. 



512 PRINCIPLES OF NATIONAL ECONOMY 

The strike. The strike has become one of the drastic meth- 
ods through which an organization of laborers may enforce 
its control over the labor supply. Theoretically the strike is 
merely the suspension of work by the laborers of a given trade 
or group of trades. If there were no waiting list and no avail- 
able mass of laborers from which to fill the shops which the 
strikers have vacated, a mere quiet suspension of work would 
be all that would be involved in a strike. This, however, is sel- 
dom the situation. There is generally such an oversupply of 
labor, especially of the unskilled kinds, as to force the strikers 
to do something else besides the mere suspension of work. They 
must manage somehow to keep others from taking their places. 
This may take the form of peaceful picketing and persuasion ; 
it may take the form of threats ; and, in extreme cases, it may 
take the form even ^of violence and terrorism. It is to be 
remembered, however, that threats, violence, and terrorism are 
necessary, even from the laborer's point of view, only when 
there is an oversupply of labor available for the jobs of the 
strikers. The ultimate cure for this situation is that which 
was suggested earlier in this chapter, — such a thinning out of 
the number of laborers, especially in the unskilled occupations, 
as to reduce the number of men to an approximate equality 
with the number of jobs. 

In justification of the strike, even when accompanied by 
threats and violence, it is sometimes euphemistically stated that 
the laboring man has a right to his job and no other laboring 
man has a right to take it away from him. Or, as it is some- 
times put, the labor unionist's eleventh commandment is, Thou 
shalt not steal thy neighbor's job. This, however, is not quite 
complete ; it really should read. Thou shalt not steal thy 
neighbor's job unless he is a nonunion man, and in that case 
thou shalt go after it with a club. 

Numbers make for weakness in bargaining but for strength in 
lighting and voting. One large fact which complicates the 
whole problem of the organization of laborers and their methods 
is that those who, because of their numbers, are weak in the 



THE ORGANIZATION OF LABORERS 513 

bargaining process become, by virtue of those same numbers, 
strong in the making of public opinion and in the election of 
candidates for office. Roughly speaking, one may say that the 
more people there are of a certain individual type, the weaker 
they are in the process of individual bargaining but the stronger 
they are in making public opinion and controlling elections. 
It is pretty certain, therefore, that they will use their strength 
in controlling public opinion and politics to compensate for 
their weakness in the bargaining process. Whatever our views 
on the purely ethical aspects of such questions as the closed 
shop, the strike, picketing, threats, and violence, we must 
realize once and for all that in a republic, where majorities 
control, there is absolutely nothing to be done about it. Those 
who realize that they are weak in the process of peaceful in- 
dividual bargaining but strong in other ways can be depended 
upon to use that strength to their own advantage. On the other 
hand, those who, because their numbers are few, are very strong 
in the process of peaceful and individual bargaining must 
realize that politically they are very weak, since they have very 
few votes. It would be as futile, therefore, to expect that when 
there is an oversupply of labor the laboring men will go on in- 
definitely, bargaining individually for jobs, accepting the dis- 
advantages under which they labor, and refraining from using 
the strength of numbers in their own interests, as to expect 
that the tides should cease to rise and fall or the winds to blow. 
When a numerous class realizes that its numbers count 
against it in bargaining but for it in fighting and voting, it is 
pretty certain, sooner or later, to try to win back, by fighting 
or by voting, what it has lost in bargaining. Therefore there 
are two very good reasons why we should try to maintain a 
balanced population. By a well-balanced population is meant 
one in which, among other things, each occupational group 
is no more numerous than is necessary to combine with other 
occupational groups. If, for example, there are no more spin- 
ners than are needed to supply yarn for the weavers, no more 
of both than are required to combine satisfactorily with other 



514 PRINCIPLES OF NATIONAL ECONOMY 

groups, no more unskilled laborers than are necessary to 
work in combination with the skilled laborers, no more of 
both than are necessary to work in combination with salesmen, 
accountants, managers, etc., the population is well balanced 
so far as these groups are concerned. When this is the case 
no group will be at a disadvantage in the bargaining process. 
That is one reason. The other is that no group would have the 
motive or the power to win back, by fighting or by voting, what 
it was losing by bargaining. Such a balancing of our population 
would eliminate the more acute phases of our labor problem. 



CHAPTER XXXVII 

THE RENT OF LAND 

Rent the price paid for the use of land. The rent of land orig- 
inally meant the price paid for its use during a given period of 
time. Its meaning is now extended to cover the income which 
the owner derives from it, whether he uses it himself or lets it 
out to someone else. The selling price of land is the price paid 
as a lump sum for its permanent possession, which includes its 
use through all future time. Its value is the present estimate of 
all its future utilities, whether they are sold or kept by the 
present owner and his heirs. There is thus a very close connec- 
tion between the value, or price, of land, on the one hand, and 
its rent, on the other. The rent is the value, or the price, of the 
flow of utilities which it yields during a given period of time, 
such as a month or a year. Both the value and the rent of land 
come under the general law of value ; both are determined by 
utility and scarcity, as is the case with all forms of value. 

Why rent is paid. The utility of land is of various kinds and 
degrees. In some cases land yields its utilities directly and is 
thus a consumers' good, or at least resembles consumers' goods 
in this respect. Parks, pleasure grounds, and residence sites 
yield their utilities in this way instead of yielding tangible prod- 
ucts. In other cases land yields its utilities indirectly ; that is, it 
produces or helps to produce tangible products which are them- 
selves useful. In these cases the utility of land, like that of all 
producers' goods, is a derived utility. Its utility is derived from 
that of its products. 

There are great differences in the utility or desirability of 
different pieces of land, whether they be used for one purpose 
or for another. In one of the chapters on land (Chapter XVI) 
it was pointed out that these differences are mainly in location 

515 



5i6 PRINCIPLES OF NATIONAL ECONOMY 

and fertility. The other qualities which make land usable, such 
as extension and solidity, all land possesses in equal degree, so 
that these qualities do not make one piece more desirable than 
another ; but in the qualities of location and fertility there are 
great * differences, and these differences powerfully affect its 
desirability and its value. 

Differences in the desirability of land. The problem of rent 
may be approached in several ways. In the first place, we may 
concentrate our attention on the differences in rent or the 
differences in the desirability of different pieces of land. There 
is always land somewhere the use of which can be had free of 
charge. Nevertheless, men will be found paying high rents for 
other land which is more desirable than that which can be had 
free of charge. The fact that it is more desirable than the free 
land is what makes it command a rent. In the case of land 
which is useful for production only, its desirability is of course 
determined by its productivity. He who secures the use of a 
superior piece of land can either produce more at the same cost 
than would be possible on the kind of land which is free or he 
can produce the same amount at lower cost. This difference in 
productivity gives its owner a rent when he cultivates or uses 
it himself, and enables a tenant to pay rent in case the land is 
worked by a tenant. 

Location as an element in desirability. That the location of a 
piece of land will affect its productivity will be clear to anyone 
who will consider that the cost of transporting goods to market 
is a part of the cost of production. If one farm is so badly 
located with respect to railroads and markets that it costs ten 
cents a bushel to haul the wheat to the nearest railroad, while 
another farm is so well located that the hauling costs only two 
cents a bushel, it is evident that if the two farms are equally 
fertile the former will be worth considerably less than the latter. 
The difference of eight cents a bushel in the cost of haulage 
would make a difference of $2 .40 per acre if the average crop on 
the two farms were thirty bushels per acre. A tenant could 



THE RENT OF LAND 517 

afford to pay that much more for the well-situated than for the 
badly situated farm. 

If land were so abundant that the badly situated farm in 
the above illustration and other land equally desirable could 
be had rent-free, and if it were the most desirable land which 
could be had free, then land of this type might be called mar- 
ginal land, or land on the margin of cultivation. By marginal 
land is meant that which, under the conditions of the market, 
men would be induced to cultivate if it cost them nothing, but 
which they would abandon and leave unused if they were 
required to pay even the lowest conceivable rent for its use. 
Under these conditions the rent of the well-located farm of 
the above illustration would be $2.40 per acre, assuming that 
wheat is the only crop. 

The margin of cultivation. Aside from the productivity of 
the land, two other factors help to determine the margin of 
cultivation. These are the demand for products and the de- 
mand for labor, or the opportunities for the employment of 
labor. An increase in the demand for products will gener- 
ally bring land into cultivation which would otherwise have 
remained idle, whereas a decrease in the demand for products 
will cause some poor land to be abandoned which would other- 
wise have remained in use. The margin of cultivation may 
change, however, for other reasons. When the prairies of the 
West were brought into cultivation the margin was extended 
in that direction, but this threw so many products on the mar- 
ket that some of the less productive lands of New England 
could no longer be advantageously cultivated. Much of this 
land was abandoned, and the margin of cultivation was con- 
tracted in this section. The extension of the margin on the 
Western frontier and the contraction on the rocky hillsides 
of New England tended to counteract one another. There 
was, however, at the same time a growing demand for prod- 
ucts, so that the expansion in one direction more than made 
up for the contraction in the other. In other words, the total 



5i8 PRINCIPLES OF NATIONAL ECONOMY 

production actually increased, despite the diminution on some 
of the New England farms. 

Factors which extend the margin of cultivation. An increase 
in the supply of labor which is seeking employment, unless 
counteracted by a corresponding increase in the demand for it 
elsewhere, will generally extend the margin of cultivation and 
cause land to be cultivated which would otherwise remain 
idle. This problem may be approached from two points of 
view. In the first place, idle land may be regarded as an 
opportunity for idle men. When the supply of labor increases 
faster than the demand for it, the number of idle men in- 
creases. Some of these idle men are then crowded out onto 
the idle land. Even if they are not actually thrown out of work, 
the results are much the same. There is always a current of 
migration from the farms to the towns. When the labor mar- 
ket in the towns is overcrowded, country boys find fewer 
inducements to leave the country. Therefore they must per- 
force remain on the farms and cultivate the land. When 
larger inducements are offered in the towns, more of them 
leave the farms and less land can then be cultivated. 

Another way of approaching this problem is by considering 
the wages of farm labor. When this labor can be had at a 
low cost, some land can be cultivated profitably which could 
not be if the same kind of labor cost more. Wherever farm 
labor is cheap we find that there is little land going to waste 
except the very poorest; where farm labor is expensive and 
hard to secure we find fairly good land actually going to 
waste. Only the best land can be profitably cultivated by 
expensive labor. It must be remembered, however, that labor 
is not necessarily expensive merely because wages are high. 
Very efficient labor may be cheap even though it is paid high 
wages, and very inefficient labor may be expensive even though 
it works for low wages. With this explanation it ought to be 
clear that with a given demand for farm products poorer land 
can be cultivated if labor is abundant and cheap than would be 
profitable if it were scarce and dear. 



THE RENT OF LAND 519 

Different grades of land. A partial illustration of the doc- 
trine of rent can be found in a study of the following table 
and the explanation which follows it. It is only a partial 
explanation, however^ because it omits the law of diminish- 
ing returns. This lack will be corrected in the subsequent 
illustration and explanation. 



Grade 


A, 


yielding looo units 


of product to 


100 


units 


of 


labor 


Grade 


B, 


yielding 900 units 


of product to 


100 


units 


of 


labor 


Grade 


c, 


yielding Soo units 


of product to 


100 


units 


of 


labor 


Grade 


D, 


yielding 700 units 


of product to 


100 


units 


of 


labor 


Grade 


E, 


yielding 600 units 


of product to 


100 


units 


of 


labor 



Let us assume a miniature community possessing five grades 
of land, as indicated in the above figure. On the best grade of 
land, which is of limited extent, loo units of labor will produce 
1000 units of product ; on the next grade, 900 units of product ; 
on the next, 800 units of product; etc. If the demand of the 
community were for only 1000 units of product, and there were 
only 100 units of labor, only the best grade of land could be 
used. Until it was all in use there would be no rent. But if 
the population were to increase so that there was an increase 
in the demand for products and also in the supply of labor, 
Grade A would not continue to be sufficient. If, for example, 
the demand were to increase so that 1500 units of product 
were needed, some of it would have to be produced on the 
second grade of land, which would thus be the marginal land. 
On this marginal grade, however, each unit of labor would 
produce only 9 units of product, whereas on the best grade it 
would produce 10 units. Clearly each producer would rather 
work on Grade A than on Grade B. Because of this preference 
he could be persuaded to pay something for the privilege of 



520 



PRINCIPLES OF NATIONAL ECONOMY 



working on Grade A. Approximately i unit of product for 
each unit of labor would be paid for the privilege of farming on 
Grade A. An owner of a portion of Grade A who worked it 
himself would be better off than an owner of a portion of 
Grade B. This excess of his income over that of an equally 
good worker on Grade B would be rent just as truly as though 
he received it in cash from a tenant. 

If the demand for products continues to increase until it 
requires 2 500 units of product, some of Grade C will have to be 
brought into use. This will now be the marginal grade. On 

Grade C, however, 
each unit of labor pro- 
duces only 8 units of 
product. Rather than 
work on this land, pro- 
ducers will be willing 
to pay something for 
the privilege of work- 
ing on either Grade A 
or Grade B. Each unit of labor will be willing to pay ap- 
proximately 2 units of product for the privilege of working 
a portion of Grade A, or i unit for the privilege of working 
a portion of Grade B, rather than be forced to cultivate land 
of Grade C. In either case it will have as much left as it 
would have if it got the whole of the product on Grade C 
without any deduction for rent. If we go on assuming an in- 
crease in the population, and a consequent increase in the 
demand for products and in the number of units of labor 
available for the cultivation of land, we shall find each of the 
grades D and E in succession brought into cultivation, and. 
the rent going up correspondingly on every grade except the 
marginal one. 

Differences in productivity. The differences in the productiv- 
ity of land may be represented or illustrated by the preceding 
diagram if it is understood that lands of different grades are 
ranged along the line OX, with the most productive piece of 




THE RENT OF LAND 521 

land at the point O and absolutely barren land at the point X, 
with every variation between. If we measure the productivity 
of the different parcels on the line OY, the curve YBX may be 
called the productivity curve. When a total product repre- 
sented by the surface OA YBC is to be produced, only the land 
between and C will be required. That at the point C will be 
marginal land, and all between C and X will be unused. The 
line BC represents the productivity of the marginal land, and 
the surface YBA will represent the rent on all the other land 
in use. 

Relation of diminishing returns to rent. This explanation, 
however, is incomplete, as any explanation of rent is incomplete 
unless it takes into account the law of diminishing returns. 
Even on the best land — in fact, on any grade of land — dif- 
ferent applications of labor and capital produce different re- 
sults. After a certain quantity of labor and capital has been 
applied to the cultivation of a given piece of land, further 
increases in the labor and capital do not yield proportionately 
increased returns.^ If this were not true it would never be 
necessary to cultivate any but the best grade of land. If, for 
example, 200 units of labor on Grade A of the land described 
in the figure on page 519 would produce 2000 units of product, 
that would be better than to spread it over both Grade A and 
Grade B, where it would produce only 1900 units of product. 
Again, if 300 units of labor applied to Grade A would produce 
3000 units of product, and 400 units of labor 4000 units of 
product, and so on indefinitely, we should have what are called 
constant as opposed to diminishing returns. If constant re- 
turns could be secured indefinitely, as stated above, it would 
never be advisable to cultivate any land but Grade A of our 
illustration. 

But the simple and well-known fact is that increasing appli- 
cations of labor and capital to the same land do not yield con- 
stant returns, much less increasing returns. Instead of 200 
labor units' yielding 2000 units of product on Grade A, and 

lAs shown in Chapter XXXIII, on The Law of Variable Proportions. 



52 2 PRINCIPLES OF NATIONAL ECONOMY 

300 labor units' yielding 3000 units of product, it is more 
likely that 200 units would yield 1800 units of product, and 
300 units 2400 units of product, or some such quantity. If 
that were the case it would be better to take Grades B and C 
into cultivation rather than to put all the increasing labor 
supply onto Grade A. Unless something like this rate of dimi- 
nution in the returns should result, the inferior grades would 
never come into use at all. 

The value of land to the community. Thus far we have been 
considering the differences in the productivity of different 
grades of land as the reason why rent is paid and as the 
factor which determines how much rent is paid for land of a 
given grade. Another way of viewing it, which leads to the 
same result, is to consider how much better off the community is 
when a given piece of land is in cultivation than when it is not. 
If there is an abundance of uncultivated land in every way as 
good, location and everything considered, as the piece of land 
in question, the only result of withdrawing the latter from culti- 
vation would be to bring into cultivation an equal quantity of 
other land. In such a case the community loses nothing when 
this piece of land is withdrawn from cultivation nor would it 
gain anything if it were brought back into cultivation. There 
being more land of this grade than can be cultivated, some 
labor must be withdrawn from other land when this piece of 
land is cultivated. 

If, however, there is a scarcity of land of the grade of the 
piece in question, there is certain to be a decrease in the 
total production of the community if it is withdrawn from 
cultivation, and an increase when it is brought back into culti- 
vation. If it is withdrawn from cultivation the labor and tools 
which were used in cultivating it must now find employment on 
other land. If they go onto poorer land, such as has been hith- 
erto uncultivated, their product will be less. The production of 
the community is decreased by the amount of the difference 
between the product on the piece of land in question and the 
product on the poorer land. If the labor and tools go onto land 



THE RENT OF LAND 523 

which is already under cultivation, they merely add to the num- 
ber of laborers and tools already on that land and carry the 
margin of cultivation a little farther. They will add something 
to the product from that land, but not an amount equal to the 
total product formerly produced on the land which is now 
thrown out of cultivation. The difference between the total 
amount produced on the land now thrown out of cultivation and 
the amount which the labor and tools could add to the product 
from other land measures the loss to the community which 
occurs when the piece of land in question is thrown out of 
cultivation. This difference, however, corresponds to the rent 
of the land. 

The law of rent. The rent of a piece of land, therefore, is 
determined by the difference between what can normally be 
produced upon it and what an equal amount of labor and capi- 
tal can produce in less advantageous positions still open to 
them. These less advantageous positions may be found either 
by going onto the inferior lands still uncultivated or by crowd- 
ing onto land already cultivated. The rent of a piece of land 
is thus seen to correspond pretty closely to its value to the 
community or the nation. It represents the net advantage 
which the community gains when the land is in use, or the net 
loss which the cornmunity sustains when it is not in use. This 
does not necessarily mean, however, that the rent of a piece of 
land represents the owner's contribution to the community or 
the nation, unless it can be shown that it was the owner that 
made the land productive. 

Price of land derived from rent. It is a common fallacy to 
suppose that the selling price of land determines its rent, the 
fact being that the rent determines the price of land. Land 
that is so well located or that has such a high degree of fertility 
as to yield its user a large surplus over the cost of operation will, 
of course, command a high price ; but it is the surplus, which is 
rent, that causes the high price, and not the price that causes 
the surplus. The surplus is caused by its good location, its high 
fertility, or some other physical or social advantage. The 



524- PRINCIPLES OF NATIONAL ECONOMY 

price of land is the capitalized value of its rent or surplus. 
If the surplus or rent is once determined and the current rate 
of interest known, the price is easily reckoned by finding what 
sum, at the current rate of interest, will yield the amount of 
the rent. Thus, if the rent of a given piece of land is found to 
be, one year with another, ten dollars an acre, and the current 
rate of interest on safe investments to be 5 per cent, the price 
will be two hundred dollars an acre. Suppose, now, that the 
conditions change so as to reduce the surplus below ten dollars : 
the price must necessarily fall. That is to say, if the price of 
the products of the land should fall or the cost of operation 
or the rate of interest should rise, any or all of these would 
of mathematical necessity reduce the surplus. The process 
of capitalization would then, of mathematical necessity, reduce 
the selling price of the land. On the other hand, a rise in the 
price of products or a fall in the cost of operation or in the 
rate of interest would, for similar reasons, increase the price 
of the land. 

Another popular fallacy is that a rise in the price of land is 
the cause of a rise in farm products, the argument being that 
when the price of land goes up, the farmer must get a higher 
price in order to recoup himself for the use of his more valuable 
land. This is like saying that the reason a tree is so tall is that 
its shadow is so long. The price of land is only a capitalization 
of the surplus which can be made by using land. When that 
surplus increases, the price must rise, as shown in the last 
paragraph. When the price of farm products rises, unless 
the cost of operation rises correspondingly, there is naturally 
a larger surplus, and this large surplus naturally makes land a 
more desirable form of property to own; consequently its 
present owners are less eager to sell and prospective owners 
are more eager to buy. This will necessarily send the price 
of land up. In other words, the rising of land prices follows 
as a result, and does not precede as a cause, the rising price of 
products. 



THE RENT OF LAND 525 

It is frequently asserted, on the basis of this reasoning, 
that even rent is not a factor in determining price. In dis- 
cussions of this topic two distinct questions have been stated, 
and the disputants have not always had the same question in 
mind. One question is, Would prices be any lower if landlords 
would remit rent ? The rather obvious answer is No, but rent 
is not annihilated when landowners remit it. The rent still 
exists, but the tenants get it (or someone else) ; and there is 
no reason why the prices should be lower when one set of 
men gets rent than they would be if the rent went to another set 
of men. If the owner of a farm were to make a gift of it to his 
tenant, it is not probable that the tenant would sell his prod- 
ucts any cheaper ; and if all owners made gifts to all tenants, 
there is no reason to think that the tenants would volunta- 
rily reduce prices or that the market conditions would be so 
changed as to compel them to reduce prices. 

Quite a different question, however, is, Would prices be the 
same if conditions were such that land yielded no rent? If 
there were so much land of the best grade as .to enable the 
community to supply its needs without making use of second- 
grade or third-grade land, obviously the conditions of produc- 
tion would be more favorable than when it is compelled to 
make use of poor.er grades. A given quantity of labor and 
capital when applied to land of the best grade will produce 
more than when it is divided among the second, third, and 
fourth grades. Products would then be more abundant and the 
price of farm products in terms of other goods would probably 
be lower. 



CHAPTER XXXVIII 

THE DESIRABILITY OF CAPITAL AND ITS RELATION 
TO INTEREST 

What is interest ? One of the most difficult and elusive of 
all problems in economics is that of the interest of capital. In- 
terest may be defined as the income which goes to the owner of 
capital, whether he uses it in his own business or lends it to 
somebody else. This income may take any one of several 
forms. The most common and clearly understood form occurs 
where a definite sum of value, represented usually by money, is 
lent by the owner to someone else. The borrower, in return 
for the loan, eventually pays back not only the principal but a 
stated sum or percentage of the principal year by year. The 
transfer of purchasing power from the lender to the borrower, 
however, does not necessarily take the foVm of money. It may 
be rather a claim upon some credit institution for money, as 
when the lender gives the borrower a check on a bank. The 
borrower then deposits this check in his own bank and pro- 
ceeds to draw his own checks against this deposit. In a case 
of this kind no tangible money is personally transferred, and 
the borrower may not even see or handle any money. Never- 
theless, there has been transferred to the borrower purchasing 
power in the form of a claim upon the bank for money. But 
the purpose of the borrower was not ultimately to secure money. 
Money is to him only a means of purchasing something which 
he really wants, and if he can make the purchase without 
actually handling the money — by handling credit instruments 
instead, or claims upon a bank for money — his purpose is an- 
swered just as well. Aristotle pointed out long ago that money 

serves merely as a claim upon society for a share of the general 

526 



INTEREST AND DESIRABILITY OF CAPITAL 527 

fund of wealth in its possession. A credit instrument is only a 
more highly evolved claim of the same kind. 

In the second place, the capitalist may transfer to the bor- 
rower not purchasing power but the material goods which 
the borrower desires and which he would buy if he were given 
the purchasing power ; that is, the capitalist may transfer to the 
borrower specific pieces of capital, such as buildings and ma- 
chinery, allowing the borrower the use of these pieces of capital 
for a definite period of time. At the end of the time they are 
of course to be returned to the lender. Meanwhile a definite 
sum is to be paid at stated periods for their use. This sum is 
in popular language frequently called rent rather than interest. 
The chief reason for calling it rent is that the sum which is 
paid in the form of money for the use of a group of material ob- 
jects cannot be called a percentage of those objects, at least not 
until they are evaluated and their quantities stated in terms 
of value. Suppose that the agreement was to pay five thou- 
sand dollars a year for a certain group of buildings and a 
mass of tools and equipment. The five thousand dollars a year 
is not a percentage of the group of buildings. If, however, the 
buildings are appraised and their value is stated as one hundred 
thousand dollars, then it is possible to reduce the annual pay- 
ment for their use to a percentage basis. It might then be said 
that the borrower was paying 5 per cent on the sum borrowed. 
Unless the transaction takes this form it is more convenient to 
say that he is paying five thousand dollars rent than that he 
is paying 5 per cent interest. The chief reason for calling it 
interest is that economists have formed the habit (and there 
are reasons for this habit) of speaking of rent as that which is 
paid for the use of land, and of interest as that which is paid 
for the use of capital. Since the buildings and the equipment 
are capital rather than land, that which is paid for their use 
would have to be called interest, unless we change the definition 
of interest. 

Distinction between rent and interest. There seem to be some 
very important reasons for distinguishing between rent and in- 



528 PRINCIPLES OF NATIONAL ECONOMY 

terest in this way. Land is a natural resource; it is not the 
product of human foresight or of human industry. Buildings, 
tools, equipment, etc. are the products of foresight, enterprise, 
and industry. That which the landowner receives as rent for 
his land he receives because he has come into the possession of 
a natural agent which neither he nor anyone else produced; 
that which the owner receives for the use of buildings, tools, 
and equipment he receives for something which he either pro- 
duced or paid someone else for producing. There seems, there- 
fore, to be a wider difference between that which is paid for the 
use of buildings, tools, and equipment and that which is paid 
for the use of land than there is between that which is paid 
for borrowed money and that which is paid for buildings, tools, 
and equipment. In this discussion, therefore, we shall adhere 
to the distinction between rent and interest which nearly all 
standard books on economics have followed. 

Distinction between interest and profits. The income of the 
capitalist may be secured from the use of capital in his own 
business. This, however, is sometimes difficult to distinguish 
from profits. Economists generally distinguish between in- 
terest and profits in this way : the business man who has his 
own capital invested in his business is allowed the current rate 
of interest on that investment ; if he labors or puts in his time 
supervising the business, he is also allowed a salary or wages 
of superintendence ; if he has anything left over after allowing 
himself interest and wages, this surplus is called profit or profits. 
If he has not been particularly successful the profits may be 
negative; in other words, he may incur a loss. That means 
that his total income may not be as great as it would have been 
if he had gone out of business, lent his capital at interest, and 
hired himself out at a salary as a superintendent. 

Interest, therefore, as it is generally defined, includes, first, 
that which the owner receives for the use of a fund of purchas- 
ing power which he transfers to a borrower ; second, that which 
he receives for the use of a mass of material goods — buildings, 
tools, equipment, etc. — which he permits the borrower to use 



INTEREST AND DESIRABILITY OF CAPITAL 529 

for a stated period; and, third, that which he receives in 
return for the capital which he owns and which he uses or 
has invested in his own business. Care must be taken, in con- 
sidering these various forms of interest, not to include too 
much. That which the lender of a fund of purchasing power 
receives in excess of the amount necessary to preserve the fund 
intact is interest, and that alone. If any insurance is involved, 
this must be deducted from the total amount received. Some 
very hazardous investments appear to pay very high rates of 
interest. This may be called gross interest, only a part of it 
being net interest, the remainder being payments for risk and 
akin to profits rather than interest. Again, when equipment 
itself is lent, rather than a fund of purchasing power, allow- 
ance must be made for deterioration. Unless the capitalist 
maintains the quantity of his capital intact and receives a sur- 
plus in addition to this he has not received interest. It might 
easily happen that a part of the five thousand dollars received 
for the buildings, tools, and equipment in the above illustration 
was necessary to keep the buildings in repair and to recoup 
the owner for the necessary deterioration. In short, interest 
is the amount which the owner of capital receives over and 
above the sum necessary to maintain the original quantity of 
his capital. 

Why is interest paid ? The problem of interest thus defined 
divides itself into two parts : first, why is interest paid ? second, 
what determines the rate of interest? One answer to the first 
question is that capital is productive. This could apply only to 
what we have defined as productive as opposed to acquisitive 
capital. That any kind of capital is productive has sometimes 
been called in question. Something depends upon the meaning 
of the word " productive." No one has challenged the proposi- 
tion that tools are useful. Those who assert that capital is 
productive mean absolutely nothing more than this. Those who 
deny the productivity of capital invariably have some other 
definition of the word *' productive" in mind, and there is not 
much to be gained by quibbling over the use of words. 



530 PRINCIPLES OF NATIONAL ECONOMY 

If tools are useful it is pertinent to ask for what they are 
useful. They are useful for production, not for consumption. 
With an adequate equipment of tools one can produce more 
than with an inadequate equipment. The formula '' More and 
better tools, more production ; fewer tools or poorer tools, less 
production" supplies the farmer and the business man with as 
good a theory of economic causation as any logician has ever 
been able to invent. If I am a farmer and perceive that with 
an additional horse I can grow a larger crop than if I did not 
have that additional horse, I am not likely to puzzle my head 
very much over abstruse questions of economic causation. 
The fact that a larger crop will result from my using another 
horse is a sufficient reason why I should try to come into 
possession of that horse. 

Marginal productivity of capital. It is true, as has been 
pointed out and argued ad nauseam, that if I did not have any 
plows or tools to use with the horse he would be of no use, or 
that if I did not have any labor to direct him he would not pro- 
duce anything. This line of argument, instead of proving that 
the horse is not productive^ merely proves that other forms of 
capital, as well as labor, are also productive. In any given situ- 
ation, with any given type of equipment, find out how much you 
can produce without any particular unit, — say the horse in ques- 
tion, — and then how much you can produce with it, and you 
have a measure of the productivity of that unit in that situation. 
At any rate, it is a fair test as to how much that unit would be 
worth when added to the rest of the equipment. If there is 
another farmer whose equipment calls for an extra horse, and 
if an extra horse will add more to the product on his farm than 
on mine, the other farmer will bid against me for the horse, and 
under the circumstances can afford to pay more for it than I. 
If he hasn't the money with which to purchase it he can 
afford to pay a little more for the use of the money than I can 
afford to pay. Apply this test to each and every kind of capital 
required, not only on farms but in shops and factories, railroads, 
stores, etc., and we get an idea of the test of the usefulness, or 



INTEREST AND DESIRABILITY OF CAPITAL 531 

productivity, of capital It might very well be, however, that 
on another farm, where there was a surplus of horses, the farmer 
in charge would find that one more horse would add little or 
nothing to his crop. Having a surplus of horses, what he would 
need more than an extra horse would be some extra plows and 
harrows, or plows and harrows of a larger size, to balance his 
equipment. If he understands the situation he will see that 
it is to his advantage to sell some of his horses or else to buy 
other equipment. This balancing of the equipment of indus- 
tries goes on all through society and is one of the fundamental 
problems of business management.^ 

Here we must repeat a caution which was given in the dis- 
cussion of value. We are not to discuss the productiveness of 
labor in general or of capital in general, any more than we are 
to discuss, under the problem of value, the utility of bread in 
general, meat in general, or water in general. We are always 
concerned with definite units which may be added to or sub- 
tracted from the existing supply. Therefore we are not con- 
cerned with the productiveness of horses in general, cows in 
general, or even capital in general, but with the need for 
definite units of capital, such as one horse more or less, one cow 
more or less on a given farm, one boiler more or less in a 
real factory, and ^0 on through the whole range of industry. 
Wherever any producer finds that he could use more capital of 
any form advantageously, he has a perfectly good reason for 
trying to get an additional unit of that particular kind of 
capital. Whether we call it the productivity of the unit of 
capital, or merely its usefulness, does not matter. 

The opposite method of reasoning is involved in the state- 
ment that if there were no labor, capital could not produce 
anything. This is dealing with labor in general and capital in 
general. It is likewise true, of course, that if there were not 
any capital, labor would not be able to produce very much 
during the next month or the next year, — not, in fact, until.it 
had equipped itself with a new supply of tools. It might very 

1 Compare, also, Chapters XVII and XXXIII. 



532 PRINCIPLES OF NATIONAL ECONOMY 

well happen that in any definite community, like the over- 
crowded section of a great city, there would be more unskilled 
labor than could possibly be used at that particular place. The 
formula "More of this particular kind of labor, more product" 
would not apply. When we speak, therefore, of the produc- 
tivity of capital, we do not mean that capital is productive 
under all possible circumstances, regardless of the surround- 
ings. Neither is labor productive in that sense ; it has to be 
located where there is at least land available, and in order 
that it may be very productive it must have an adequate supply 
of tools. In short, nothing is productive when it stands alone, 
unrelated to many other things in the surrounding universe. 
Labor, of course, is a more fundamental and primary agent 
of production than capital, since capital is itself the result of 
labor, thrift, and enterprise. But we are not, in a practical 
work on economics, dealing with an absolutely primitive 
economic situation; we are dealing rather with the conditions 
which we find all around us and with the specific needs of 
specific industries and specific communities. 

What does capital include ? As capital was defined in the 
chapter devoted to that subject, it includes something more 
than producers' goods. It includes consumers' goods which 
are lent, rented, or hired in order to secure income for their 
owner. In these cases the income of the capitalist is not 
due to the productivity of the consumers' goods thus lent; 
it is due rather to their usefulness in consumption. He who 
builds a dwelling house, or hires someone else to build it, and 
then rents it to an occupant is virtually selling the flow of 
utilities which the house furnishes to the occupant during a 
definite period of time. These utilities are in the form of com- 
fort, convenience, luxury, and even style in some cases; but 
the problem of interest is much the same, in the last analysis, 
whether the capital be productive or acquisitive. 

Capital itself, not its value, is productive. Those who deny the 
productivity of capital generally have a special definition of 
capital. Instead of thinking of productive agents they are usu- 



INTEREST AND DESIRABILITY OF CAPITAL 533 

ally thinking of a sum of value. They do not necessarily mean 
money, but a fund of value which is embodied in capital goods. 
Of course the value of capital goods does not produce any- 
thing. The value of the horse does not cause him to do good 
farm work ; it is the fact that he does good farm work which 
causes him to have value. If, instead of thinking of the farmer's 
capital as horses, cows, and other equipment, we think merely 
of the value which is embodied in them, we may easily reach 
the conclusion that capital is not productive ; but if, instead of 
thinking of the value which is embodied in them, we think of 
the objects themselves, we can hardly avoid the conclusion that 
they are the agents by which production is increased. 

In order to bring the law of interest under the general law 
of value, let us recall the fact that things have value only when 
they are wanted by someone. This is as true of capital as of 
anything else. If we confine our attention to that portion of cap- 
ital which consists of producers' goods, without considering the 
subject of consumers' goods which are used by their owners 
for the getting of an income, it is safe to say that the use of 
capital is desired only for the sake of what it will add to the 
productive power of the user. He does not want it for its own 
sake. If it added nothing to his productive power he would 
not want it and would not be willing to pay a price for the privi- 
lege of using it. Even the owner desires to own capital not 
because capital is itself capable of gratifying a desire directly 
but because it is capable of adding to his income. If it added 
nothing to his income (that is, if, as the: result of using it in his 
business, he was merely able to get back the original cost, that 
is, the principal) he would have no motive for owning it or 
using it. The more it will add to the productivity of his busi- 
ness, the more he will desire the use of it. 

Why capital is wanted. The productivity of capital, or the 
advantage of having the use of it, is subject to the principle of 
marginal productivity, as is the productivity of labor and land. 
If you increase the number of instruments of a given kind in 
any industrial establishment, leaving everything else in the 



534 PRINCIPLES OF NATIONAL ECONOMY 

establishment the same as before, you may within limits in- 
crease the total product of the establishment somewhat, but 
you will not increase the product in proportion to the increase 
in the number of instruments in question. If you increase all 
the instruments in a given industrial establishment without 
increasing the labor at the same time, each instrument will be 
used a little less intensively, or it will be idle a greater number 
of minutes per day, simply because of the scarcity of labor. On 
the other hand, of course, if you diminish the number of in- 
struments or the total equipment, leaving the amount of labor 
the same, each instrument, or each unit of the equipment, will 
have to be used more intensively. 

The productivity of capital decreases, other things being equal, 
as its quantity increases. Take a farm, for example. With a 
given labor force, the greater the number and variety of tools 
and implements, the less intensively each one is likely to be 
used ; and the smaller the number, the more intensively each is 
likely to be used. There are many farms on which it is found 
that there are such a number and variety of tools and imple- 
ments that the farmer is really not getting any interest on a 
large part of his investment. Some expensive tools are idle so 
much of the year that they do not pay for themselves ; that is, 
the farmer never gets back the original price which he paid, to 
say nothing about getting interest on that price. On the other 
hand, there are other farms so poorly equipped that every tool 
in the farmer's equipment is used very intensively, and it would 
be money in his pocket to invest in additional equipment. For 
every dollar which he put into more and better tools he would 
get back not only the original cost price but something in 
addition which could be called interest on the investment. 

That which is found to happen on farms is also found to 
happen in larger industrial establishments, — factories, railroads, 
etc. That which is true of an individual farm, shop, or other 
business establishment is also true of the community as a whole. 
If, for example, there are very few plows in a given community 
where there is an abundance of land, many laborers, and much 



INTEREST AND DESIRABILITY OF CAPITAL 535 

other capital besides plows, each and every plow would be a 
matter of considerable importance ; it would be in general de- 
mand and would be used a great number of days in the year. 
Under these conditions you could say of that community, 
"One more plow, considerably more product; one less plow, 
considerably less product"; in short, the marginal productivity, 
in that particular community, of that form of capital called 
plows would be high. If, on the other hand, there were a great 
number and variety of plows in the community, other factors 
remaining the same, 
each one would be a 
matter of much less 
importance; each one 
would be idle a greater 
number of days in 
the year. Then you 
could say, '' One more 
plow, comparatively 
little more product ; 



■~^ 
























































^^ 


B 








^~ ^ 


B' 












^-. B" 








■^^ 
























































































'^ . 



D D' D" 



m 



short, 



one less plow, comparatively little less product"; 
the marginal productivity of plows would be low. 

Applying the same method of reasoning to other forms of 
capital or to all forms of capital, we reach the same conclusions. 
An abundance of all forms of capital, land and labor remaining 
the same, would give a low marginal productivity to capital ; 
whereas a scarcity of all forms of capital, land and labor re- 
maining the same, would give a high productivity to all forms 
of capital. This would show itself also in the case of liquid, 
or uninvested, capital. Where all forms of capital are scarce, 
one hundred dollars invested in tools would add considerably to 
the productivity of the community ; but where all forms of 
capital are very abundant, then one hundred dollars invested 
in additional tools would be of comparatively little value. 

The preceding diagram will serve as an illustration of this 
law and also as a means of introducing the next question to 
be considered in the general problem of interest. 



536 PRINCIPLES OF NATIONAL ECONOMY 

Let the amount of capital in the industrial community be meas- 
ured along the horizontal line AC; let the productivity of capital be 
measured along the perpendicular line AE ; and let the descending 
line EC represent the rate of decrease in the marginal productivity 
of capital. If the amount of capital were measured by AD, the 
marginal productivity would be measured by the line BD, or AF. If 
the amount of capital were measured by AD', the marginal produc- 
tivity would, other things remaining equal, be measured by the line 
B'D', or AF' ; and when the amount of capital equaled AD", mar- 
ginal productivity would equal B"D", or AF". From this it follows 
inevitably that if capital went on increasing to AC, the marginal pro- 
ductivity of capital would be destroyed altogether. That is to say, 
the supply of capital would have reached that limit where no more 
could be used to advantage, and some could be spared without loss.^ 

IT. N. Carver, The Distribution of Wealth, pp. 223-224. The Macmillan 
Company, New York. 



CHAPTER XXXIX 

THE COST OF CAPITAL AND ITS RELATION TO INTEREST 

Why capital is scarce. Seeing that the marginal productivity 
of capital, or the advantageous use of its marginal increment, 
diminishes as the supply of capital increases relatively to other 
factors, it is quite important that we should be able to account 
for the supply of capital as well as for its demand. Its demand, 
as has already been suggested, is based upon its desirability in 
production or in consumption ; that is, upon its productivity or 
the opportunity for its advantageous use. Unless, therefore, the 
supply were in some way limited, productive capital might be- 
come so abundant as to leave it with no marginal productivity 
at all. We found, when we were discussing the value of com- 
modities, that the cost of producing them operated as a check 
on production and kept the supply within such limits as would 
give them a price approximately sufficient to pay the cost of 
production. Some factor must be found which limits the supply 
of capital as cost of, production limits the supply of an ordinary 
commodity. 

The irksomeness of waiting. There are two factors which are 
obviously at work : one is the mere cost of producing the capi- 
tal goods ; the other is the cost of waiting, or the disinclination 
which many individuals feel toward waiting. The cost of pro- 
ducing tools needs very little discussion. Unless the farmer's 
plow will return him, before it is worn out, enough to replace 
the price which he originally paid for it, he will of course have 
no motive for paying that price. If plows should become so 
numerous on a given farm that the farmer felt that he would 
probably never get back enough from a new plow, added to 
those already in use, to repay the price of that plow, it would 

537 



538 PRINCIPLES OF NATIONAL ECONOMY 

be foolish for him to buy it. If every farmer behaves in this 
way, certainly no more plows will be bought than can be used 
with that degree of advantage. If he has to pay fifty dollars 
for a new riding plow, and if he figures that in the course of its 
lifetime it will add only fifty dollars to his product over and 
above what he could produce with his existing equipment, then 
he would of course gain nothing from its purchase ; he would 
merely get back the original purchase price. If the average 
farmer had no disinclination toward waiting it is probable that 
farmers would buy so many plows as to reduce the marginal 
productivity of plows to the level of the cost; that is, to the 
level of the purchase price. 

But suppose that the plow which cost fifty dollars will return 
the farmer only five dollars a year and will last ten years ; it then 
just replaces its original cost ; the farmer will have got back 
at the end of ten years the money which he put into it, and no 
more. Meanwhile he has had to wait ten years. If he does not 
mind waiting, — if waiting is not in the slightest degree irk- 
some to him, — he will probably be willing to buy a plow under 
such circumstances^ though there will be neither loss nor gain. 
If, however, he does not like to wait, — if he prefers present 
enjoyment to future enjoyment, — then he will hold on to his 
fifty dollars in the first place rather than spend it for something 
which will return fifty dollars in ten years' time. Under these 
circumstances he will certainly not buy the plow unless he has 
so few plows as to give a higher marginal productivity than 
that which we have been discussing. If he has so few plows 
that the possession of an additional plow will in the course of 
ten years add one hundred dollars to his income, he will add 
fifty dollars to his wealth during the ten-year period, — that 
is to say, fifty dollars will go to replace the purchase price 
of the plow ; the other fifty dollars is surplus. This and this 
alone is interest, and a rather high rate of interest; namely, 
10 per cent per annum. But if every farmer is likewise disinclined 
to wait, the market for plows will be limited. Only as many 
will be purchased as will yield a return large enough to more 



INTEREST AND COST OF CAPITAL 



539 



than pay the purchase price. In other words, farmers in general 
will get some interest on that which they invest in plows. 

This may be illustrated by the following diagram. 

Let us suppose, as in the former diagram, that the number of 
implements of a certain kind, say plows, is measured along the line 
AC, and their marginal productivity along the line AE. In this case, 
however, we mean their total marginal product during their average 
lifetime, or that amount which an average plow will add to the prod- 
uct of the community during its lifetime, over and above what could 
be produced without it. 
Todistinguish this from ^ 
the marginal product 
per year we shall call it 
the total earnings of a 
plow. Letting the de- 
scending line represent 
the decline in the total 
earnings of each plow as 
the number of plows in- 
creases, the line DB, or 

AF, would represent the total earnings of each plow when their number 
was represented by the line AD. When their number is AD' the 
total earnings of each would be D'B', or AF'; and when the number 
is AD" the total earnings of each would be D"B", or AF". Let us 
further suppose that Xhe cost of making plows is represented by the 
perpendicular distance of the various points on the ascending line 
GB' above the base line AC. If this cost were the only check on the 
production of plows there is no reason why they should not increase 
to the point D', where the total earnings of each plow would just pay 
the cost of making the most expensive plow of the total supply. 
They would sell at the uniform price of D'B', or AF', which would be 
their normal equilibrium price. The total earnings of a plow would 
then just cover the price which the buyer would have to give for it.^ 

Why the present value of a productive agent is less than the 
future value of all its products. Now as a matter of fact, people 

IT. N. Carver, The Distribution of Wealth, pp. 226-227. The Macmillan 
Company, New York. 



- ^ 
































"^N. 


B 








^"-. B' 







"''^^ 


B" 








































"^ 



D 



D' D' 



540 PRINCIPLES OF NATIONAL ECONOMY 

do not like to wait. Waiting is to some quite as irksome as 
working. It is also quite as necessary to efficient production. 
Anything, whether it be working, waiting, or risking, which is 
necessary to efficient production, and which at the same time is 
irksome, must be paid for. The fact that it is necessary for 
production furnishes a sufficient motive for paying for it ; the 
fact that it is irksome makes it necessary to pay for it, because 
men will not otherwise perform this function. In order that 
there may be an adequate supply of tools, which is necessary 
for efficient production, there must be waiting. Labor must be 
performed in the making of the tools^ and then somebody must 
wait until they have been used for a number of years in order 
to get back from their use the equivalent of that which was 
originally expended in making them. If the laborers who make 
the tools are not themselves willing to wait, they may sell them 
to someone else, who then undertakes to wait for their products 
to mature. If both the laborers who make the tools and the one 
who purchases them are disinclined to wait, their market price 
will have to be something less than the sum of their future 
earnings. The laborers, being disinclined to wait, will be will- 
ing to sell for a cash price somewhat lower than the total sum of 
future earnings, and the purchaser will not be willing to pay a 
price which would equal the sum total of the future earnings. 
In the price-making process, therefore, the capital goods must 
necessarily sell for less than the sum of the future earnings. 
The buyer who holds them during their lifetime finds himself in 
possession of a surplus, which is his compensation for waiting. 

Take the case of a blacksmith who, by his own labor, makes a 
plow out of materials which cost him five dollars. Let us suppose 
that he can in a fortnight make a plow which will earn a total of 
thirty dollars during its lifetime of ten years. Deducting the cost of 
materials, this leaves him twenty-five as the net earnings of his fort- 
night's work ; but he must wait for his wages, receiving them in in- 
stallments over a period of ten years. If he does not mind waiting 
this will be no drawback, and he would just as lief make a plow as 
work for the same amount in cash or in present consumable goods. 



INTEREST AND COST OF CAPITAL 541 

Or, having made such a plow, he would not sell it for less than thirty 
dollars, the total amount which it will be expected to earn during 
its lifetime. 

But if he does mind waiting and would much prefer to receive his 
wages at once, he would not make plows at all so long as he could 
earn twenty-five dollars per fortnight in present consumable goods. 
Or, having made a plow which will earn thirty dollars in the course 
of its lifetime, he would be willing to sell it for less than that amount, 
which, counting out the cost of the raw materials, would net him less 
than twenty-five dollars for his work. If no blacksmith could be 
found willing either to wait ten years for his wages or to accept less 
than twenty-five dollars for the amount of work necessary to make a 
plow, no plows with such small earning capacity would be made un- 
less someone else could be found who did not mind waiting and who 
would therefore be willing to pay thirty dollars for a plow and then 
wait ten years to get his money back. But if no such person could 
be found, the making of plows would stop until their growing scarcity 
raised their marginal productivity and their total earnings somewhat 
above thirty dollars.^ 

Though it is not likely that anyone would be willing to wait 
ten years to get his money back, one might be willing to wait if 
he could get back not only the original sum of money but a 
surplus besides. The farmer, for example, might be willing to 
pay thirty dollars for a plow which would in the course of ten 
years earn him fif ty^ dollars. The twenty dollars surplus would 
be interest. The problem, as it presents itself to the farmer 
who is contemplating investing money in a plow, is very much 
the same as that which presents itself to a lender who is 
contemplating lending money to someone else. As a rule he 
prefers to keep his money rather than lend it, unless he can get 
a surplus by lending it. Every form of investment involves the 
same problem. The investor is compelled to give up something 
in the present (that is, either money or the opportunity to spend 
money for present goods) in order that he may have the means 
of securing the money or goods at some time in the future. The 

IT. N. Carver, The Distribution of Wealth, pp. 229-230. The Macmillan 
Company, New York. 



542 PRINCIPLES OF NATIONAL ECONOMY 

disinclination which is generally felt toward waiting is such 
that men will not, as a rule, invest and wait unless there is a 
chance to get a surplus. The surplus is then in a sense the 
reward for waiting. 

It is not to be assumed that there is anything inherently meri- 
torious in waiting merely for the sake of waiting. The only 
merit there is in the process is in the increased production which 
comes through the use of effective tools and equipment. Since, 
furthermore, one cannot provide oneself with effective tools 
and equipment without waiting or inducing somebody else to 
wait, we have a sufficient reason why waiting should be paid 
for when it results in increased production. If it does not nor- 
mally result in increased production, there is no reason for 
waiting and therefore no reason why it should be paid for. 

Not all waiting is irksome. While it is true that, as a general 
rule, men are disinclined toward waiting (that is, they prefer 
present to future goods), still there is a certain amount of 
waiting which takes places normally without any great amount 
of sacrifice and which therefore does not need to be paid for. 
There would be some saving even if no interest could be secured 
on savings. In fact, it is probable that a considerable amount 
of saving would take place even if men were compelled to hire 
vaults or storage places in which to keep their savings. In this 
case savings could be said to yield negative interest rather than 
positive interest. 

In so far as it is true that men estimate present consumption 
higher than future consumption, it applies only to the consump- 
tion of corresponding or similar increments of income. A man 
with a large income may be said to derive less utility from the 
last dollar of his income than from the others ; or, to put it in 
another form, he can lose one dollar of his income with com- 
paratively little feeling of loss or sacrifice ; but if, with the same 
general scale of wants, his income were much smaller, then the 
loss of a dollar would be more keenly felt. If his income is very 
large, he may find it difficult to spend it all on present consump- 



INTEREST AND COST OF CAPITAL 543 

• 
tion. In this case it may be easier to save it than not to save it. 

To invest a little of one's large income, may, therefore, involve 
no cost or sacrifice whatsoever. 

On the other hand, anyone who is gifted with a moderate 
degree of foresight will look ahead and consider the possibili- 
ties of future emergencies. He may therefore lay up for a rainy 
day, for sickness, or for old age, even though there is no possi- 
bility whatever of securing interest on his savings. If one who 
has a large present income foresees the possibility that at some 
future time his income may be cut off, he may reason somewhat 
as follows : '' I can spare the few unimportant luxuries which the 
last hundred dollars of my income will buy, without any appre- 
ciable sacrifice. At some future time this hundred dollars may 
supply my most pressing needs, if I should find myself some 
day without an income. Therefore it will be very much better 
if I save this hundred dollars and lay it up against that day 
than if I consume it now." Another person, with a smaller 
income, would reason in the same way, though the sum which 
he would lay by would be smaller. And a person with a larger 
income would likewise reason in the same way, though the sum 
which he would lay by would be larger. Taking the whole com- 
munity, especially if it contains a great many well-to-do people, 
a considerable mass of wealth would be saved for this reason 
alone. This kind of saving may be said, therefore, to involve 
no cost; and yet those who save in this way are able to se- 
cure interest on their savings, along with those who save at 
considerable sacrifice. 

Some capital accumulated without expectation of interest. If 
those sums which are saved in this way without sacrifice were 
sufficient to meet the demands of all communities for capital, 
such a thing as interest would not exist ; that is to say, if so 
much were saved in this way, and there were so few opportuni- 
ties for using capital as to reduce the marginal productivity of 
capital to the minimum point, capital would practically be a 
drug on the market. If, however, the opportunities for the 



544 PRINCIPLES OF NATIONAL ECONOMY 

« 
productive use of capital are so great that more capital is de- 
manded than can be saved without cost, then, in order to induce 
further saving, a surplus must be paid for its use. 

Interest a part of the general law of value and price. The 
price which is paid for the use of capital comes under the same 
law as the price which is paid for anything else. In the chapter 
on Scarcity it was pointed out that some goods are produced, 
under certain circumstances, practically without cost. Trout, 
where the fishing is good, are caught for the pleasure of the 
sport. If the number of trout that can be caught for pleasure 
is sufficient to satiate the desire for trout, then trout commands 
no price ; if this quantity is not sufficient to satiate the desire, 
and consumers are demanding more, then they must begin 
to pay a price to induce other fishermen to undertake the work 
of providing an adequate supply. The law here is the same as 
that which controls capital. Some capital will be accumulated 
without cost. There is probably no community in existence, 
however, in which enough capital to supply all demands is 
provided in this way. It is therefore necessary for all who need 
it to offer a price in order to induce a larger volume of saving 
than would take place if no interest were paid; that is, no 
price for the use of capital. 

The cost of saving is, like other forms of cost, ultimately a 
matter of psychology. Among people who are gifted with a 
large degree of forethought, saving is less irksome than it is 
among people who live mainly in the present. Among people of 
the latter class very little saving will take place unless there is 
a distinct reward for it. Among people of the former class a 
great deal of saving would take place even if there were no 
reward. A community with little forethought is therefore 
always one in which interest rates are high, because there are 
small accumulations of capital and, the supply being small, 
there is great need for more. It is the need for more of a 
thing which induces people to pay a price for it. 

The functional theory of interest. This theory of interest may 
be called a functional theory of interest, to correspond with the 



INTEREST AND COST OF CAPITAL 



545 



functional theory of value and the functional theory of wages, 
which have already been outlined. The function of a high price, 
as has been pointed out, is to call forth a larger supply ; the 
function of high wages is to stimulate a larger supply of the 
labor which receives high wages ; and the function of a high rate 
of interest is to call forth a larger supply of capital for which 
interest is paid. A community that needs more capital can get 
it only by inducing larger savings. These larger savings may 



N, 

1 

1 "^. 


B 


, 1 

Interest _,^ 

1 ^-''' 


I 


B' 


i ^i- — — 


""-^ 


Cost of Production 

1 

1 





K 



D 



D' 



be secured either by compulsion (that is, by taking a part of 
the social income by authority and setting it aside) or by 
attraction (that is, by offering a reward for saving). There is 
no other possible way that has ever been suggested, even on 
paper, for accomplishing this necessary result. 

Let us assume that the amount of a certain kind of capital is meas- 
ured along the line AC, and its marginal productivity along the line 
AE, the descending curve EC representing the decline in the marginal 
productivity as the supply increases. If there were nothing to check 
its production but the cost of producing it, the supply would nor- 
mally increase to the point D' , where the marginal product would 
just cover the marginal cost, and there would be no interest. This 
point is located by the intersection of the cost curve GB' with the 
productivity curve EC. But in addition to the cost of production 
there is the disadvantage or sacrifice of waiting. The effect of this 



546 PRINCIPLES OF NATIONAL ECONOMY 

is illustrated by the rising curve HB. This curve represents, by its 
distance above or below the cost curve GB, the positive or negative 
sacrifice of saving the different parts of the supply of capital. Where 
this curve is below the cost curve it means that there is an advantage 
rather than a disadvantage connected with the exchange of present 
for future goods which saving implies; where this curve coincides 
with the cost curve there is neither advantage nor disadvantage con- 
nected with saving ; but when it rises above the cost curve there is 
a disadvantage connected with saving which becomes a check upon 
the production of capital in addition to that effected by the cost of 
producing it. 

If the production of capital should stop at the point K, where, as 
shown by the intersection of the abstinence curve HB with the cost 
curve GB', there is neither advantage nor disadvantage connected 
with saving, its marginal productivity would be represented by the 
line KL. This would give its owner an advantage far in excess of any 
disadvantage connected with its production, and this would stimulate 
its further production. But in order to increase its production it 
would be necessary to do more waiting as well as more work. From 
this point on, further waiting begins to be burdensome, acting as a 
positive check upon production. The normal tendency would be for 
capital to increase up to the point D, where the combined disad- 
vantage of working and waiting, or of cost of production and absti- 
nence, would be just compensated by the marginal productivity of 
that kind of capital.. At this point the marginal productivity would 
be represented by the line DB, the marginal cost of production by 
the line DI, and the marginal abstinence by the line IB. The total 
present value of that kind of capital would then be represented by 
the parallelogram ADIF'. The total product of the present supply of 
capital during its lifetime would be represented by the parallelogram 
ADBF, and the total surplus, or interest, by the parallelogram F'IBF. 

THE PURCHASER'S DEMAND FOR AGENTS OF PRODUCTION 

The same result is reached by approaching the subject from the 
side of demand, and regarding the disadvantage of waiting as reduc- 
ing the purchaser's demand (as distinguished from the borrower's de- 
mand) for capital instead of checking its supply. It is, generally 
speaking, the amount which purchasers will pay for it which consti- 



INTEREST AND COST OF CAPITAL 



547 



tiites the reward of the makers of capital and serves as an inducement 
to continue the work of production. So long as the purchaser's de- 
mand will give plows, for example, a price equal to the cost of pro- 
ducing them, the producers will continue their work. As already 
pointed out, if there were no disadvantage connected with saving, 
men might be expected to pay as much in cash for a piece of capital 
as they expect it to return them in the way of income during its life- 
time. In that case the purchaser's demand curve for capital would 

H 



E 






\^ 



INTEREST 



I- 



ToTAL Present 
Value of Capital 



S' 



/.,- 



K 



D 



M 



coincide with the productivity curve of the foregoing diagram. There 
would then be an equilibrium of supply and demand at the point 
where the demand-productivity curve EC intersects the cost curve 
GB'. But since there is a certain disadvantage connected with saving, 
and men are not always willing — not even those who inveigh against 
interest on capital — to pay as much in cash or present consumable 
goods for a piece of capital as it will produce during its lifetime, the 
purchaser's demand curve does not coincide with the productivity 
curve, and the equilibrium of demand and supply is reached at some 
other point. 

This way of approaching the problem may be illustrated by means 
of the above diagram, which is a modification of that on page 545. 
The purchaser's demand for capital is, in this case, represented 



548 PRINCIPLES OF NATIONAL ECONOMY 

by the descending curve HM, which bears the same relation to 
the productivity curve EC as the abstinence curve HB bore to the 
cost curve GB' in the last diagram. Where this demand curve is 
above the productivity curve it means that men are so anxious to pro- 
vide against the uncertainties of the future that they will give a 
larger number of present goods for the sake of having a smaller num- 
ber at some time in the future, or that men of enormously large in- 
comes would have so much trouble trying to consume them all that 
they would rather invest a part in some enterprise for the sport of 
carrying it through, even though they may never get all their money 
back, while men of moderate incomes would rather provide against 
a rainy day than to consume all their incomes, even though their 
savings shrink in the interval. Yet if the enterprises return a surplus, 
and the savings expand, both classes of savers will take advantage of 
the possibility of getting an increase. Where the demand curve coin- 
cides with the productivity curve, it means that there is neither 
advantage nor disadvantage connected with saving ; and where the 
demand curve falls below the productivity curve, it means that there 
is a disadvantage connected with saving, and therefore less will be 
paid for a piece of capital than it will earn in the future. 

Under these conditions the equilibrium of demand and supply, 
which determines the present selling value of agents of production, 
would be reached when the supply of capital was represented by the 
line AD, for this would be the point where the purchaser's demand 
for the different forms of capital would give them a value just equal 
to their marginal cost of production. Yet the marginal productivity 
of that amount of capital would be represented by the line DB ; the 
present selling value of capital, which is equivalent to the present 
value of its future product, would be represented by the line DI ; and 
the surplus which would come to the buyer who took it at its present 
selling value and waited for its earnings to mature would be repre- 
sented by the line IB. The total present value of all now-existing 
capital would be represented by the parallelogram ADF'I ; its total 
future earnings, computed on the basis of its marginal productivity, 
by the parallelogram ADFB ; and the total interest or surplus which 
would come to those who buy the capital at its present value and 
wait for its product to mature would be represented by the parallelo- 
gram F'IFB. The annual interest would have to be computed by 
dividing this gross amount by the average lifetime of the now-existing 



. INTEREST AND COST OF CAPITAL 549 

capital. This would give the lump sum going as interest to the own- 
ers of capital each year. The annual rate of interest would have to 
be computed by finding what percentage the annual interest is of the 
total present value of the capital.^ 

The foregoing theory of interest," though based largely on 
the marginal-utility theories of value and price as wrorked out 
by such writers as Jevons, Marshall, Bohm-Bawerk, and others, 
yet lays rather more emphasis on automatic or costless saving 
than those v^^riters had done. It has led some later v^^riters to 
the rather hasty conclusion that since a great deal of the capital 
actually saved is saved v^^ithout cost, therefore interest could 
practically be abolished or taxed away without greatly reducing 
the amount of saving or the supply of capital.^ Such a con- 
clusion is of doubtful validity. In the first place, there is not 
a great deal of automatic or costless saving except among people 
who have already developed great economic foresight and 
acquired more or less fixed habits of thrift. Only they save 
automatically. Had it not been for the observed advantages to 
be gained through these habits it is doubtful whether they could 
ever have reached a high development among any people. One 
of the several advantages of thrift would be destroyed if interest 
were taxed away. If, after generations of experience, habits of 
thrift are once developed, the mere momentum of those previ- 
ously acquired habits might conceivably carry on the work of 
saving, for a time at least, in spite of this diminution in the total 
advantage of saving ; but it would be difficult to develop these 
habits still further, and it is doubtful if they could be main- 
tained indefinitely even at their present level if one of the 
inducements were removed. Again, if interest were destroyed 

IT. N. Carver, The Distribution of Wealth, pp. 242-249. The Macmillan 
Company, New York. 

2 It was set forth in a paper read before the Economic Seminar of Johns 
Hopkins University in January, 1893, and published in the Quarterly Journal 
of Economics for October of that year. Professor Commons had arrived inde- 
pendently at the same conclusion at about the same time. 

3Cf. Cassel, The Nature and Necessity of Interest, especially A. B. Wolfe, 
Savers' Surplus and the Interest Rate, Quarterly Journal of Economics (Novem- 
ber, 1920), Vol. XXXV, No. I. 



550 PRINCIPLES OF NATIONAL ECONOMY- 

or taxed away it would reduce the incomes of those who had 
shown the propensity to save, either automatically or for the 
deliberate purpose of getting interest. They would therefore 
have less from which to save. Granting that others would find 
their incomes correspondingly increased, still, these would nec- 
essarily be the ones who had not previously saved much capital, 
and the probabilities are against the assumption that they will 
now save enough to compensate for the diminution in the 
amount saved by the previous savers. 

Another error or oversight of those who argue that interest 
might be destroyed or taxed away without greatly reducing the 
total saving is the assumption that only a few marginal savers 
would be affected, or that the great mass of savers are not 
marginal savers and would not be affected by such a policy. 
As a matter of fact, every saver is probably a marginal saver to 
some extent ; that is, every saver is probably induced to save a 
little more when interest is possible than he would be induced 
to save if he were not permitted to receive interest. Marginal 
saving takes place, therefore, along an extended line and not 
simply upon a single point on that line. If practically every 
saver in a vast number were to save only a little less when the 
inducement of interest is removed, there would be a considerable 
reduction in the total saving. 



CHAPTER XL 

PROFITS 

What are profits ? Profits may be broadly defined as the in- 
come of the independent business man who receives neither 
stipulated wages, rent, nor interest. In a somewhat narrower 
sense they include whatever he has left over after he has al- 
lowed himself interest on his own capital, rent for his own 
land, and wages for his own labor. This would seem to narrow 
the meaning of profits down to the reward for taking risk, 
though risk must be defined rather broadly. The enterpriser, 
as the independent business man may with fair accuracy be 
called, is essentially the man who undertakes something and 
relieves others of a part at least of the risk which they would 
otherwise have to take. 

It would be quite possible, for example, for a group of labor- 
ing men to borrow capital, build their own factory, and run it. 
But if they did so they would always be in danger of losing not 
only what they themselves had invested but even their wages 
for a time ; that is to say, if there should come a bad season, 
when the demand for products fell off, they might have to work 
for very low wages or for none at all. If some individual or 
group of individuals will undertake to run the business for 
them and guarantee them a certain fixed rate of wages, they 
are relieved of a part of that risk. 

Profits as payment for insurance. Again, the men who fur- 
nish the capital may jointly assume all the risks of the enter- 
prise. They may, however, be in part relieved by having one 
individual or group of individuals undertake the business and 
guarantee them interest on their capital. In such a case, how- 
ever, the enterprisers usually have to invest some of their own 
capital. In such cases they, the enterprisers, put their own 

551 



552 PRINCIPLES OF NATIONAL ECONOMY 

capital in the most hazardous position. This is virtually the 
distinction between common stock and preferred stock in a 
corporation. Those who own the common stock take the 
greater risk. So long as the enterprise is running at all, the 
owners of the preferred stock must get their interest, whether 
the owners of the common stock get anything or not ; but if 
the enterprise is very successful, the owners of the common 
stock get larger returns than the owners of the preferred stock. 
These larger returns over and above the rate of interest will 
be called profits. 

The lure of an enterprise. In a smaller business, run, let us 
say, by an individual rather than by a corporation, the in- 
dividual may borrow a part of his capital, and in this case, so 
long as he is in business at all, he must pay interest on what he 
borrows, whether he has anything left for himself or not. In 
case the business succeeds very well he gets a surplus which 
may be called profit. The lender of borrowed capital gets no 
more than the stipulated rate of interest. It is the function of 
the independent business man or the enterpriser to insure the 
other participants in the industry against at least a part of their 
risk. He cannot, of course, relieve them of all risks. Any in- 
come which the insurer gets over and above the normal rate of 
interest on the capital which he himself puts in may be called 
profit. This is the lure which induces men to undertake risks 
of this kind. 

This suggests a functional theory of profits which fits in with 
the functional theories of value, wages, and interest already 
described in the previous chapters. The function of high prof- 
its is to induce a larger number of men to undertake independ- 
ent enterprises. Where a larger number of such enterprises 
are needed, there are only two ways of getting them started. 
One is for the community as a whole to take a part of the social 
income and by authority invest it in new enterprises ; the other 
is to offer a special inducement to private individuals to under- 
take the new enterprises voluntarily. This is usually done by 



PROFITS 553 

the offer, on the open market, of high prices for the products 
of the enterprise. 

Necessity of taking risk. Risk-taking is no more meritorious 
in itself than is waiting or working. It is meritorious only when 
it results in increased production and well-being. Still, the 
well-being of society or the increased production of the goods 
which society needs makes it absolutely necessary that some 
risks should be taken. Risk is therefore something which can- 
not be avoided. These risks are of many kinds and degrees. 
The tastes of the people may change so that the product of a 
contemplated enterprise may be no longer desired. Some new 
invention may render obsolete the processes used and the ma- 
chinery which has been installed. Strikes, insurrections, wars, 
and unforeseen physical calamities, such as fires, storms, and 
earthquakes, must also be taken into account. It would be very 
difficult to imagine any productive undertaking that did not 
involve risk. In the case of the farmer bad weather, insect 
pests, and diseases of all kinds threaten to decrease or destroy 
his income. Risk-taking is therefore as necessary as working 
or waiting in order to get effective production under way. 

Irksomeness of risk. Unless, however, risk-taking were in 
some way irksome or disagreeable, it would not deter men from 
entering business, and there would be nothing here that would 
have to be paid fon That is to say, if people did not dislike to 
take risks there would be no hesitancy in entering a risky occu- 
pation. It would therefore not be necessary to offer a reward to 
induce men to enter it. In fact, so many would crowd into haz- 
ardous enterprises, and so increase the competition, as to leave 
no surplus for risk-takers as a class, the losses of some balancing 
the gains of the others. This is what actually happens in those 
fields, such as pure gambling, where men gamble for the excite- 
ment. But since risk-taking is sometimes irksome or disagree- 
able and since, in such cases, men would rather not hazard 
their accumulations and their present income, they must be 
paid something as a lure, or attraction to overcome this dis- 



554 PRINCIPLES OF NATIONAL ECONOMY 

inclination. So few crowd into these enterprises as to leave for 
those who do make the venture comparatively little competition. 
This enlarges their opportunities for a profit and may leave 
the whole class with a surplus. The reason here is precisely the 
same as the reason for paying wages or interest or for paying 
the price of any commodity. The function of price, in a free 
country, is to overcome the disinclination to work, wait, or 
take risks. Risk is, in such cases, a part of the cost which 
the price must, in the long run, cover. 

It has already been suggested that some risk is not burden- 
some and in many cases is actually exhilarating and attractive. 
The tendency to gamble is so strong in some people as to lead 
them to hazard not only wealth but even life and limb on dan- 
gerous enterprises. Different individuals, of course, differ in 
this respect, as they do in the inclination or the disinclination to 
work or to wait. There are also different kinds of hazards 
which appeal to different people. A study of lotteries shows 
that there is a greater propensity to hazard small sums, even 
on the remote chance of winning a large prize, than to hazard 
a large sum on the chance of winning a small prize, even when 
the chance is so large as to amount almost to a certainty. This 
might be tested by a laboratory experiment. The student is 
advised, however, not to try an actual experiment of this kind, 
because it is against the law ; but it is not against the law to 
imagine such an experiment, and he is therefore recommended 
to try the experiment in imagination. 

Let him, in imagination, offer for sale two kinds of lottery 
tickets, contained in boxes which we will designate as Box A and 
Box B. Let him put in Box A 2000 tickets, all of which are 
blanks but one. Let this one be good for $1000. In Box B let 
him put 2000 tickets, only one of which is a blank, all the rest 
being good for $1000 each. Let him experiment by trying to sell 
these two sets of tickets and see what price he can get for them. 
Now mathematically the tickets in Box A are worth 50 cents 
apiece ; that is to say, one who bought them all at 50 cents apiece 
would neither gain nor lose. Those in Box B are mathematically 



PROFITS 555 

worth $999.50 each (that is to say, one who bought all the 
tickets at that price would neither gain nor lose), but the 
market price, or the price at which they will actually sell, would 
probably differ from the mathematical value. It is quite prob- 
able that the tickets in Box A would easily sell for more than 
50 cents apiece, possibly a dollar apiece, — at least the experi- 
ence with lotteries in the past, when they were legal, would 
lead one to believe this, — and yet every buyer would be paying 
twice as much as the tickets were worth. It is extremely im- 
probable that the tickets in Box B would sell for anything 
approximating their mathematical value. It is doubtful whether 
they would sell for S900 each. If they did, each buyer would 
be getting his ticket for much less than it was mathematically 
worth. No lottery ever did or ever could afford to sell tickets 
like those in Box B. 

Now occasionally there is a business risk that resembles 
somewhat the buying of one of the tickets in Box A. A great 
deal of gold-mining stock has been sold on the market under 
these conditions. The shares usually sell at a very low price, 
and there is a very remote chance of ever getting anything 
back ; and yet once in a great while a large prize is drawn. It 
is the belief of careful observers that more money has been 
spent on the shares of gold-mining companies than all the gold 
mines have ever yielded. In other words, here is a field where 
there are literally no profits for investors as a class, the losses 
exceeding the gains. The reason seems to be the psychological 
one that this kind of risk is not irksome but is in itself attractive. 

The ordinary conservative business risk, however, more 
nearly resembles the buying of a ticket from Box B. The 
shares of a conservatively managed corporation, for example, 
in a somewhat standardized business usually sell at a fairly 
high price. The prizes to be drawn or the profits to be made 
are usually small, though fairly safe, as compared with mining 
stock. There is very little in this that appeals to the gambling 
spirit. There is a certain irksomeness about it and a disin- 
clination to this kind of risk-taking. The result is that such 



556 PRINCIPLES OF NATIONAL ECONOMY 

shares generally sell for less than their mathematical value, 
so that investors as a class make somewhat more than they 
lose. There is, in other words, a real surplus here that may be 
called profits. 

That part of a business man's income which comes to him 
because of his function as a risk-taker, or because he relieves 
certain others of a portion of the risk they would otherwise 
have to take, is somewhat analogous to the earnings of an in- 
surance company. The only possibility by which an insurance 
company could earn anything is by collecting more from the 
people insured in the way of premiums than it pays to them for 
their losses. Of course if the insurance company receives more 
from the insured than it pays them in the form of indemnifica- 
tion for losses, they, in turn, must pay the insurance company 
more than they ever receive back for their losses. Why do they 
do this ? In the main, because of the irksomeness of risk, they 
are willing to pay something more than they ever receive back, 
for the comfort of feeling safe. Similarly, the laboring man, 
whether he works for wages or a salary, is willing to give in 
the form of service a somewhat greater value than he ever 
receives, for the comfort of feeling safe. That is to say, a 
group of laborers who assumed their own risks by owning and 
operating their own factory might, in the course of many years, 
receive more on the average than they would receive if they 
worked for wages, but they would always be more or less 
anxious or worried about the condition of the market and the 
possibility of having to go some weeks or even months without 
any wages at all. This sort of worry would be so irksome 
that most of them would prefer to receive a little less and be 
certain of getting it than to have the prospect of receiving a 
little more in the long run without feeling the same degree of 
certainty. The employer who thus insures them may find him- 
self with a surplus for much the same reason that an insurance 
company does. There is the same risk and presumably the 
same justification in one case as in the other. 



PROFITS 557 

Relation of risk to abstinence. There is a close parallelism 
between the part played by risk in the determination of profits, 
by abstinence in the determination of interest, and by cost 
production in the determination of the price of a reproducible 
commodity. It was pointed out in Chapter XXXIX, on The 
Cost of Capital and its Relation to Interest, that the necessity 
of waiting, combined with the fact that waiting beyond a cer- 
tain point is disagreeable, tends to reduce the present price of a 
piece of capital to something less than the sum of its future 
earnings. The one who buys it at its present selling price and 
waits for its earnings to mature will normally and in the long 
run find himself in the possession of a surplus as the result of 
his waiting. Since men are generally disinclined to waiting, 
they never bid against one another for the possession of 
future goods vigorously enough to raise their present price 
to the level of the sum of their future earnings. The result of 
this is that the normal selling price of a piece of capital is low 
enough to allow its purchaser a surplus. In a similar way the 
risk connected with carrying on any enterprise, particularly a 
new enterprise in a changing society, may reduce the present* 
value of the whole equipment somewhat below the probable 
value of its products even after allowance is made for interest. 
Because of the general disinclination to assume risks of the 
kind ordinarily met with in business, the competitive invest- 
ments (that is, the competitive buying of productive goods and 
embarking on productive enterprises) are less intense than they 
would otherwise be. It is for this reason that those who under- 
take such enterprises may be expected, in the long run, to secure 
a profit over and above the interest on the capital which 
is invested. 

It was also pointed out in Chapter XXXIX that not all 
waiting is irksome, and that some waiting is experienced without 
any hope or expectation of surplus income. The parallelism be- 
tween risk and waiting may be carried a step farther. Not all 
risk is irksome. Some risks are undertaken for the sake of the 



558 PRINCIPLES OF NATIONAL ECONOMY 

excitement. Boys sometimes like to skate over thin ice just 
because it is dangerous. Men sometimes like to gamble their 
money just because it is dangerous. All sorts of risks are 
taken for the sheer excitement of the hazard. When you find 
a business enterprise which appeals to the gambling instinct, 
men will be found so eager to buy or to invest in the risk as 
to give it a market value somewhat greater than its mathemati- 
cal or economic value. Those who persist in buying such risks 
invariably lose in the long run, though they may now and then 
win on some individual venture. 

Egotistic belief in luck, Adam Smith long ago pointed out 
that men are not only egotistical regarding their own abilities 
but are generally rather fond believers in their own luck. Even 
though they are convinced that mathematically the chances are 
against them, their egotism leads them to believe that their own 
luck may offset the effect of mathematics. Of all superstitions 
the belief in luck is one of the most widespread. It is this sort 
of superstitious egotism on which the professional gambler and 
the lottery flourish. 

Relation of the market to the mathematical value of a risk. 
In the case, however, of an enterprise which does not appeal to 
the gambling instinct, men are generally so reluctant to invest 
that the market value of the risk is usually somewhat less than 
its mathematical value. Men who persist in buying such risks 
inevitably gain if they continue long enough and if they are 
not ruined by their early losses. In the class of risks which 
appeal to the gambling instinct, the more one invests the more 
nearly certain one is to lose. If one were to buy all the lottery 
tickets, one would be absolutely certain to lose, because the 
lottery sees to it that the total price of the tickets exceeds the 
total value of the prizes. In the other class of risks — namely, 
those which do not appeal to the gambling instinct — the mar- 
ket value is less than the mathematical value, as already stated. 
It follows from this that if one were to buy all such risks one 
would be absolutely certain to gain, for the sum total of the 
market values is less than the sum total of all the mathematical 



PROFITS 559 

or economic values. Those who invest in the gamblers' risk as 
a class lose rather than gain ; those who invest in the ordinary- 
business risks as a class gain rather than lose. 

The question of the residual share. In view of all that has 
been said, it is safe to conclude that profits are made up of 
what is left after the other shares have been paid. This does not 
mean, however, that profits are a residual share. The term 
^'residual share" has been discussed in a good many treatises 
on economics. By a residual share is meant the only share 
which is not determined independently. It has sometimes been 
argued, for example, that inasmuch as rent is determined by 
a law which works independently of other laws of distribu- 
tion, since wages are determined by the standard of living 
which likewise is supposed to work independently of other 
laws of distribution, and since the rate of interest tends to work 
uniformly through the community, regardless of minor changes, 
profits are therefore undetermined by any law but are merely 
what is left over after the other shares are accounted for. It 
is quite as easy to show that any other share is a residual share 
in this sense as it is to show that profits are a residual share. 

Many years ago Walker pointed out that profits are deter- 
mined by a law similar to that of rent as applied to land. 
Profits, according to this law, are determined by the difference 
between the productivity of a given business man and that of 
the least efficient business man who could manage to stay in 
business. The latter was called the no-profit business man or 
entrepreneur, and he occupied a position analogous to the no- 
rent land on the margin of cultivation. A more efficient busi- 
ness man, however, could reduce the cost of production to a 
point somewhat lower than this no-profits man or else produce 
a better product, which would sell at a higher price. Herein lay 
his opportunity, and his only opportunity, for profits. Assum- 
ing that he paid the same rate of wages and interest and a rent 
which was proportional to the advantage of the site, his only 
chance of doing better than the other man was to organize 
these factors more effectively and to supervise them more dili- 



S6o PRINCIPLES OF NATIONAL ECONOMY 

gently by effecting economies which the other man was unable 
to effect. He would then find himself in the possession of a 
surplus. Beginning with profits and accounting for them by 
this differential law, Walker proceeded to show that rent and 
interest are also determined by definite laws. This left only 
wages to be accounted for. Therefore he assumed that wages 
are a residual share. 

One may, however, prove by the same process that either rent 
or interest is a residual share. It all depends on which share 
you consider last in the series. The result of this, moreover, 
has resolved the whole doctrine of a residual share into an 
absurdity. Since the independent business man, or the entre- 
preneur, is the only one whose income is not the result of 
specific bargaining, and since he is the only one who does not 
sell his services for .a definite price, he may be said to receive 
whatever is left over. The laboring man bargains for a definite 
rate of wages ; and whether the business is making a profit or a 
loss he gets these wages as long as the contract stands. The 
capitalist lends his capital at a definite rate of interest and gets 
that rate of interest so long as the business keeps going, whether 
it is making a profit or a loss. Similarly with the landowner. 
But the entrepreneur is the only one whose income hinges on 
the question of profit or loss for the business as a whole. 

The business man the chief bargainer. Every participant in 
a competitive enterprise is more or less a bargainer, but the 
independent business man is the chief bargainer of all. When 
the laboring man has bargained for a rate of wages, the rest 
of his work consists not in bargaining but in working ; when 
the capitalist has bargained for a rate of interest, that is the 
end of his bargaining ; and so with the landlord. But the in- 
dependent business man is the bargainer per se ; he bargains 
for everything — his raw materials, his help, his capital, his in- 
terest — and he also bargains with the purchasers of the prod- 
uct. He is the unbought buyer of everything and the unsold 
seller of everything connected with the business. It therefore 
happens that skill in bargaining is one of the greatest elements 



PROFITS 561 

in his success in securing profits. Bargaining, however, con- 
sists, in the first place, in investing, and the investment of capi- 
tal is a very delicate operation. To invest successfully one 
must foresee the future needs of the community as expressed in 
the demands of the market. To err at this point is to fail. 

Because of the disinclination of the average man toward 
taking the ordinary risk, the competition is somewhat intense 
for the safe positions of the laborer and the lender of capital. 
The intensity of this competition tends to keep their shares 
somewhat lower than they would otherwise be, but this dis- 
inclination makes the competition somewhat less intense among 
the business men who have to assume the chief risks. This, in 
turn, leaves them with somewhat larger incomes than they 
would get if the risks were less irksome and the competition 
more intense. The surplus income which comes to them in this 
way is called profits. 

COLLATERAL READING 

Carver, Thomas Nixon. The Distribution of Wealth. New York, 1 904. 

Malthus, T. R. An Essay on the Principle of Population (ninth edition), 
chaps, i and ii. London, i S88. (Develops the famous thesis regarding " the 
constant tendency of all animated life to increase beyond the nourishment 
prepared for it") 

Marshall, Alfred, Principles of Economics (fifth edition), Book VL 
New York, 1907. (Develops the idea of a normal equiUbrium of demand and 
supply as the determining factor in distribution.) 

Ricardo, David. Principles of Political Economy and Taxation, chap. ii. 
London, 191 3. (States the famous Ricardian theory of rent.) 

Taussig, F. W. Wages and Capital. New York, 1896. (A clear and 
convincing exposition of the relation of capital to wages.) 



PART VI. CONSUMPTION 



CHAPTER XLI 
MEANING AND IMPORTANCE OF CONSUMPTION 

Two meanings of the word "consumption." There have been 
two meanings given by economists to the term '^consumption 
of wealth." By one group it has been made to include any utili- 
zation of wealth in which the wealth is worn out, used up, or 
destroyed in the process ; by another group it is defined as 
meaning only such utilization as gives direct satisfaction to a 
consumer. Under the first definition coal is consumed when it 
is burned to make steam for the running of machinery as well 
as when it is burned to supply warmth for the comfort of the 
human body ; under the second definition only the latter use 
of coal would be called consumption. Those who hold to the 
first definition are compelled to divide consumption into two 
kinds ; namely, productive consumption and unproductive 
consumption. It is always explained, however, that the term 
"unproductive consumption" does not mean useless or un- 
necessary consumption. It means that wealth thus consumed, 
in contradistinction to that which is productively consumed, 
is not used up in the process of producing other wealth. It is 
used rather for the final purpose for which all wealth is com- 
monly supposed to be produced ; namely, the direct satisfaction 
of human desires or needs.^ 

The tendency among recent writers is to use the term "con- 
sumption" in the narrower sense. By the consumption of 
wealth under this definition is meant the culmination of the 
whole economic process ; namely, the satisfaction of human de- 
sires. Wealth which is worn out or used up in the process of 
production is not itself yielding satisfaction to consumers 

'^ Compare the author's article on "Consumption" in the Encyclopaedia 
Americana. 

56s 



566 PRINCIPLES OF NATIONAL ECONOMY 

directly. It is yielding it indirectly, or helping to produce 
other things which will satisfy consumers directly. 

The purpose of the user is the determining factor. Under 
modern conditions goods are used either for direct satisfaction 
or for the getting of an income. If they are being used for 
the getting of an income, they are not being consumed in the 
economic sense. The physician's automobile which is used 
in his profession is being worn out, but it is not being consumed 
in this sense. When the same automobile is used for his own 
enjoyment or that of his family, it is being consumed. Again, 
a thing may be in the process of consumption even though it is 
being used up very slowly. A diamond which is used as an 
article of pleasure or adornment is in the process of consumption, 
even though it may never be really worn out ; but when it is a 
part of the stock of the jeweler, like the rest of his stock, it is 
being used for the purpose of getting an income. A substantial 
piece of furniture, when used for direct satisfaction, is being 
consumed ; but while it is in a furniture store the immediate 
purpose of the owner is to gain a profit from it rather than to 
enjoy it, and therefore it is not yet in the process of consumption. 
In short, the consumer of an article is the one whose desires it 
satisfies directly. The article begins to be consumed whenever 
it begins to satisfy a consumer's desires directly ; that is, when 
it has passed through all the channels of business and trade, 
where it is used for the purpose of getting an income, and comes 
into the possession of someone for whose satisfaction it is 
designed. 

Importance of consumption. Most textbook writers on eco- 
nomics have regarded the consumption of wealth as a department 
of the subject coordinate with such departments as production, 
exchange, and distribution. None of them, however, has given 
as much space to it as to those other departments. The reason 
has apparently been the general opinion that consumption is 
essentially an individual matter with which the public has had 
little or no concern. Laws relating to consumption have been 
called sumptuary laws and have generally been condemned or 



CONSUMPTION 567 

only half-heartedly approved. There is a growing opinion, 
however, that consumption is quite as important, from its effect 
on national prosperity^ power, and greatness, as any department 
of economics. Even the regulation of consumption, as in the 
case of laws regulating or prohibiting the use of alcoholic 
beverages, is becoming popular. Probably no movement of re- 
cent years in America has been quite so popular or so democratic 
as the prohibition movement. 

The importance of the consumption of wealth is further 
emphasized by the consideration that as many and as dire 
calamities have overtaken nations and peoples because of their 
irrational habits of consumption as because of inefficient sys- 
tems of production, exchange, or distribution. In fact, con- 
sumption reacts powerfully upon all the other departments, 
particularly upon distribution. It was shown in the chapter 
on What determines the Rate of Wages that the standard of 
living of the laboring classes, which is a part of consumption, 
has much the same influence upon the price of their labor 
as that exercised by the cost of production upon the price of 
a material commodity. Again, the rate of the accumulation of 
capital, upon which so many things depend, is largely deter- 
mined by the habits of consumption. The effect of luxury 
upon industry and general national strength is one of the largest 
of all questions. These illustrations are enough to show that 
the subject of consumption deserves the most careful study 
and the most serious treatment which economists can give it. 

Ratio of consumption to production. In a profound illumi- 
nating article on War and Economics,'^ Dr. E. V. Robinson calls 
attention to the fact that in any country, when its production 
exceeds its consumption, the result is economic progress, but 
that when consumption exceeds production the result is eco- 
nomic retrogression. When production exceeds consumption, 
wealth is accumulating and taking on durable forms ; when 
consumption exceeds production the national wealth shrinks, 
and the nation lives on its accumulated capital and, more- 

^ Political Science Quarterly (December, 1900), Vol. XV, p. 581. 



568 PRINCIPLES OF NATIONAL ECONOMY 

over, allows its accumulated fund of durable wealth to deterio- 
rate. Since it spends little time and energy in keeping its 
durable wealth in repair or its volume intact, but spends most 
of its time and energy in producing ephemeral goods for imme- 
diate self-gratification, its great architectural monuments, if it 
has any, sink into decay ; its buildings become dilapidated for 
the same reason ; its soil becomes depleted because no energy is 
spent in conserving its fertility; the people live, as it were, 
from hand to mouth, and everything tends downwards. 

When production exceeds consumption, on the other hand, 
not only are durable forms of wealth conserved — kept in repair 
and intact — but they are continually improved and new forms 
produced. There is energy to spare from the work of producing 
ephemeral articles for immediate consumption, and time is de- 
voted to permanent works and new forms of construction. 
Durable goods multiply in quantity, capital accumulates, more 
and better tools and equipment are provided, and productive 
power accumulates by a kind of geometrical progression. 

Whether, in the nation at large, production exceeds consump- 
tion or not depends on the general habits of the average person. 
If the average person demands large quantities of those things 
which supply physical and temporary satisfaction, such as lux- 
urious food and drink, fashionable clothing, and expensive 
amusements, there will be a tendency for consumption to exceed 
production. If, however, the average citizen is satisfied with 
the kind of food which nourishes, and increases strength and 
efficiency, with clothing which affords comfort and conven- 
ience, with amusements which are inexpensive and which tend 
to preserve the health, strength, and agility of both mind and 
body, there will be a tendency for wealth to accumulate. 

Other factors are, however, involved. There might be a popu- 
lation with simple habits such as we have indicated, but with no 
desire for the durable satisfactions of life and with little energy 
to devote to production. Such a population would necessarily 
remain in a low state of civilization. It would not provide 
abundantly either for the temporary or for the permanent means 



CONSUMPTION 569 

of satisfaction, but would remain in sloth and squalor. But if, 
in addition to the simple habits of consumption so far as food, 
clothing, and amusements were concerned, the average person 
possessed an intense desire for durable goods, — for architecture, 
libraries, schools, and other civilizing agencies, — the conditions 
would be favorable to the accumulation of wealth and to all 
forms of economic progress. If, in addition to all these, the 
average person were energetic and not disinclined toward work, 
— if he were willing to study hard and work hard, and if his 
motives were such as to drive his mind and body at high speed, — 
the conditions would be still more favorable. This combination 
of favorable conditions would make progress almost a necessity. 
Nothing except a geological cataclysm or a world war would 
prevent such a people from advancing in the arts of civilization. 

Preference for durable goods. It is to be borne in mind that 
the motives and desires of people are fundamental to this prob- 
lem. As was shown in a previous chapter, any people can have 
as much progress and as high a state of civilization as they 
desire, provided they desire them strongly enough and are 
willing to pay the price. 

Value of a man. From the standpoint of national prosperity 
the value of the individual depends on the excess of his produc- 
tion over his consumption. The following formula will deter- 
mine with mathematical accuracy how much a person is worth 
from the standpoint of national prosperity : 

V=P-C 

In this formula V stands for value (that is, the value of the 
man); P stands for his production; C, for his consumption. 
Thus the formula reads, The value of the man equals his pro- 
duction minus his consumption. In the cases where his con- 
sumption exceeds his production his value is negative ; he is a 
drag on progress, and the world will at least save his victuals 
when he leaves it. 

The whole life is the unit. Lest this be too hastily inter- 
preted, it should be pointed out that a human life as a whole, 



570 PRINCIPLES OF NATIONAL ECONOMY 

and not a fragment of it, should be regarded as a unit. The 
consumption of a child exceeds his production, but this does not 
condemn him. So, likewise, during the declining years of those 
who reach a good old age consumption may exceed production, 
but this does not condemn the life. If the life as a whole 
produces more than it consumes^ it leaves the world richer by 
that difference. 

Again, production should be given a very wide interpreta- 
tion. One may produce without handling material goods of 
any kind, but by inspiring the productive virtues in others, by 
teaching productive skill to other people, by scientific investi- 
gation, by transmitting knowledge, and in various other ways. 
If, after making all allowance for these different forms of pro- 
ductivity, the mature individual in sound health finds that he 
is producing less than he is consuming, it is time for him to 
begin to consider his ways and to experience a change of heart. 
He needs to be converted from a waster into a producer. 

Boarders at the national table. Dairymen sometimes use the 
term "boarder" to describe a cow whose feed and care cost 
more than her milk is worth. Every wise dairyman tries to get 
rid of his boarders and keep only those cows whose production 
exceeds their consumption. The formula V=P — C applies very 
clearly to the value of the cow. A wise farmer would not keep 
a horse whose production did not exceed his consumption. 
A manufacturer would discard a machine which required so 
much power, care, oil, repairs, etc. as to exceed the value of 
its product. It would seem that men ought to be held to at 
least as high a standard as that to which cows, horses, and 
machines are held. A man who falls below that standard 
is as much of a drain upon his country as is the cow, horse, 
or machine. 

The class of boarders includes not simply the tramps and 
beggars but everyone else who is not usefully engaged, even 
though he or she lives upon his wife's or her husband's earnings, 
his wife's or her husband's fortune, or upon inherited wealth. 
The class includes even others. Even those who are usefully 



CONSUMPTION 571 

engaged may be consuming such expensive products and may 
require so many servants to wait upon them as to use up more 
man power than they replace by their own work. It would be 
an interesting exercise in patriotism if every mature person 
should ask himself seriously whether the country is the gainer 
or the loser by reason of his existence, whether the man power 
required to produce for him and take care of him is greater 
or less than the man power which he contributes to the nation's 
fund of productive energy by his own work. 

The conservation of man power. The importance of this con- 
sideration is peculiarly clear in a time of great national crisis, 
such as the World War of 1914-1918; when all the liberal 
nations were at death grips with a military autocracy. The 
necessity of conserving every ounce of man power was upon 
every nation. We saw clearly then that anyone who was not 
usefully engaged was a menace rather than a help to us in our 
struggle. The food alone which such a person consumed was 
acutely needed, to say nothing of the man power which was 
used up in other ways by his wasteful habits of consumption. 
Even those who were usefully engaged should have understood 
that luxurious consumption on their part was an interference 
with the plans and purposes of their country. To consume 
unnecessary luxuries is to require an unnecessary quantity of 
man power to produce for one, and necessarily reduces the 
quantity left for fighting the nation's battles or producing 
necessary supplies. The same principle applies in time of peace, 
though the results of wasteful consumption are not then so 
dangerous nor so tragic as in time of war. 



CHAPTER XLII 
RATIONAL CONSUMPTION 

Difference between a high and a rational standard of living. 
Economists have generally classified standards of living on 
the basis of their cost or expense. A high standard of living 
has meant merely an expensive standard; a low standard of 
living has meant simply a cheap standard. Very little attention 
has been given to the difference between a rational and an irra- 
tional standard. By a rational standard of living is meant one 
which increases the margin between one's production and one's 
consumption. In the formula V = P — C,a.s given in the preced- 
ing chapter, the most valuable man is the one in whom P ex- 
ceeds C by the greatest margin. The purpose of the present 
chapter is to contend that the most rational standard of living 
is the one which produces the most valuable man. 

This margin of difference between P and C would be in- 
creased, of course, either by decreasing C, by increasing P, 
or by doing both at the same time ; that is, if, without reducing 
in any degree his efficiency as a producer, a man were to re- 
duce his cost of living, he would thereby be adding to his value 
from the standpoint of progress. To that extent he would en- 
able the community to produce more than it consumed. He 
would thus be a factor in the accumulation of productive power 
or of the durable products of civilization. If, however, by 
reducing his cost of living he at the same time reduced his 
productive efficiency in the same proportion, there would, of 
course, be no gain^ and there might be some loss involved. If, 
on the other hand, by spending more on himself, especially on 
books and other means of education, on tools, or on more nour- 
ishing food, he were able to increase his productive efficiency, 
his increase in consumption would justify itself. 

572 



RATIONAL CONSUMPTION 573 

From this point of view the problem for every individual 
who desires for any reason to add to rather than subtract from 
the strength and prosperity of his country is to adopt that 
standard of consum.ption which will leave the largest margin 
between production and consumption. From the same point 
of view it would frequently be necessary that one man should 
spend more on himself than another would be justified in doing. 
Take, for example, a great surgeon, whose time is exceedingly 
valuable, not only to himself but to the community he serves. 
He might very properly keep an automobile, a chauffeur, and 
other timesaving devices and agencies. He might even keep 
a valet to look after his clothes. If these forms of expendi- 
ture would enable him to give more people the benefit of his 
skill, it would be to their advantage for him to spend money in 
these ways. This applies to all others whose time and services 
are valuable to the community. For the same reason he might, 
by increasing his consumption in various ways, increase his pro- 
duction more than enough to pay the added cost of his living. 
But an inexperienced surgeon, whose time is not valuable to 
the community, — who, in fact, has time to spare, — could not 
properly indulge in the same timesaving devices. For such a 
person to employ a valet or even a chauffeur would be ridic- 
ulous waste and ostentation. 

Buying trinkets is not good for business. In opposition to 
this point of view there is a popular theory to the effect that 
lavish expenditure is somehow good for business. The difficulty 
with this argument is that it always assumes that if the Individ-^ 
ual is not consuming lavishly, he is not spending but hoarding 
his money. It is surely as good for business and labor that 
one should spend money on builders and architects as on 
milliners and confectioners. He who consumes lavishly spends 
his money on confectioners, milliners, and other producers of 
immediate and temporary satisfactions. He who consumes 
rationally spends as much money as he who consumes lavishly, 
but spends it on things which build and improve rather than 
on things which merely afford temporary gratification. A com- 



574 PRINCIPLES OF NATIONAL ECONOMY 

munity of lavish consumers would, of course, give actual em- 
ployment to those whose work is to amuse and gratify, but 
little employment to builders and others producing for future 
generations. A community of rational consumers, on the other 
hand, would give more employment to those who build for 
future generations, and less to those whose work is to gratify 
the interests of the immediate present. There is no essential 
difference in the amount of money spent in the two cases, pro- 
vided the two have equal quantities of money to spend. The 
difference is in the way they spend it and in the direction they 
give to enterprises and industry. The community that spends 
money in building for future generations will improve from 
generation to generation ; each generation will inherit from the 
preceding one a larger fund of durable wealth and will add to 
this and bequeath a still larger fund to successive generations. 

Buying durable goods is investing for the future. If we were 
to start these two communities side by side, with equal numbers 
and equal natural resources but with different habits of con- 
sumption, it would not be many generations before a marked 
difference could be seen between the two communities. The 
community which spent its income for immediate gratification 
would fall behind the one which spent a part in building for the 
future. It would not be many generations before the latter 
community would outstrip the former, and the people from 
the former would be emigrating to find employment and other 
advantages in the latter. 

The miser and the spendthrift. Instead of placing the miser 
and the spendthrift in opposite categories, we should really 
put them together. The miser is a lavish consumer in a most 
important sense. A consumer is defined as one who uses 
wealth for his immediate gratification. In a previous chapter 
consumers' goods were defined as goods used for direct and 
immediate satisfaction. Now a miser, instead of using his 
wealth productively, keeps it for his direct and personal en- 
joyment. With extreme gratification he counts his hoard. 
He loves to handle it, to see it glitter, and to hear it jingle. 



RATIONAL CONSUMPTION 575 

He is in the strictest sense a consumer of gold. He is very 
much like the spendthrift in that he gives up everything in 
order to get gold and to enjoy it personally, just as the ordinary 
spendthrift gives up everything for personal enjoyment of 
other kinds. If, instead of hoarding his gold in his cellar, our 
traditional miser were to use it in gilding his house, no one 
would doubt that he was a spendthrift. Whether he hoards 
his gold in his cellar or uses it for purposes of adornment 
makes very little difference. The same amount of gold is 
withdrawn from circulation, and much the same effect on the 
market is produced in either case. 

Both the miser and the spendthrift should be contrasted with 
the rational buyer, or the investor in durable goods. The true 
investor buys goods of which he himself will probably never 
be able to absorb the full utility. He buys goods that will last 
so long that future generations will get a part of their utility. 
Those future generations will therefore have a better start than 
he did. If this is kept up indefinitely, generation after genera- 
tion, by all members of the community, it will be a very pros- 
perous and progressive community ; but if each individual of 
each generation merely says, ''What has posterity ever done for 
me that I should be called upon to do anything for posterity ? 
Let us eat, drink, and be merry ! " that will always be a 
backward community. 

The case of rival communities. It was suggested above that 
if two communities started side by side with equal natural 
advantages but with different habits of spending, we might get 
a test of the comparative merits of these habits. This may be 
used likewise as a means of testing, in imagination at any rate, 
the rational quality of a standard of living. That standard of 
living which would enable a community or nation to make the 
most rapid and permanent progress would have to be com- 
mended. Something depends, however, on our definition of 
progress. There may be about as many ideals of progress as 
there are people who have ideals. Without attempting a 
full and complete definition, it would seem fairly safe to sug- 



576 PRINCIPLES OF NATIONAL ECONOMY 

gest that among other things progress should include general 
improvement in comfort, well-being, and satisfaction. 

The whole life of the nation as well as of the individual to be 
considered. Whether this form of progress is worth what it 
costs or not is another question. The individual spendthrift 
doubtless thinks that his immediate satisfaction is more impor- 
tant than his future well-being or that of his descendants. He 
therefore endangers his future well-being for the sake of satis- 
faction in the present. To him progress is not worth the price. 
The price is present abstinence. He would probably not deny 
that saving and economy would make for progress (that is, 
would make him better off in the future) ; he would merely say 
that he did not care for progress so much as for present gratifi- 
cation. So with a spendthrift nation; it might agree that 
accumulation of wealth and improvements in comfort and well- 
being would be characteristic of progress and that thrift and 
economy would contribute to that end, but it might decide that 
it did not care so much for progress as for present gratification. 
A nation feeling this way gets what it prefers. The future, how- 
ever, probably belongs to those individuals and those nations 
which possess more of the time sense, — to those who are able 
to think of the whole of life as a unit rather than of every 
moment as sufficient unto itself. 

Leaving out of the discussion for the present the question as 
to whether prosperity is worth while or not^ but assuming that 
it is worth while, the test which we have suggested would be a 
good one. What standard of living, if adopted and followed per- 
sistently generation after generation, would increase the com- 
fort and well-being of the community and develop the power to 
support increasing numbers of people and support them beitter, 
to add to the productive power of each generation, and ulti- 
mately to raise the economic, social, poHtical, and even military 
strength of the nation to the maximum? Granting that there 
are other factors in the problem, we still have the right to insist 
that the standard of living is one important factor. The stand- 
ard of living which contributes most to progress as we have 



F^ATIONAL CONSUMPTION 577 

defined it is therefore to be commended. That standard of Hy- 
ing will contribute most in which the net contribution of the 
average person is the highest; that is, where his production 
exceeds his consumption by the widest margin. 

Let us return to the formula V = P — C. That is the best 
standard of living which enlarges the value of the average 
person to the maximum. 

It must begin to appear that rational consumption is as 
important a factor in national prosperity as efficient production. 
The relation between consumption and production is even 
closer than we have yet shown it to be. In a most important 
sense useless consumption is a waste of labor, or of productive 
power. It requires labor, or productive power, to produce every- 
thing which we consume. If our consumption is such as to 
enable us to give back an equal amount of productive power, 
there is no waste ; but if we consume in excess of that which is 
necessary to maintain our working capacity at its maximum 
efficiency, the labor which produced the things which we con- 
sume in excess is wasted as truly as though it were badly 
directed or were working with crude and unsuitable tools. 

Liberal ideas as to what is necessary. It is well, however, to 
be rather liberal in our ideas as to what is necessary in order to 
maintain a man's working capacity at its maximum. Consider- 
able recreation and relaxation are always recognized as neces- 
sary. The anticipated enjoyment, not only of games and other 
forms of recreation but of objects of comfort and delight, is a 
spur to energy. It is not only a spur to energy ; it is also a 
means of creating and preserving a joyful frame of mind, with- 
out which sustained effort is impossible, and without which it is 
frequently asserted that no really fine work of any kind is 
ever done. 

Joy in work. Looking forward to a holiday or a vacation has 
sustained many a laborer through weeks and months of study 
and toil. The desire to possess a bicycle or an automobile has 
galvanized many an otherwise indolent boy into strenuous pro- 
ductivity. The pleasure of giving useless presents to their chil- 



578 PRINCIPLES OF NATIONAL ECONOMY 

dren at Christmas time has lightened the toil of many a father 
and mother through many a hard winter. In our attempts to 
define a rational standard of living we must not overlook a 
multitude of things which people want and want intensely with- 
out being able to give any good reason why they want them. 
Women can no more give a reason why they like babies and 
finery than a fox terrier can give a reason why he likes to chase 
cats. There is no more certain way of spoiling a boy than by 
compelling him to give a reason for everything which he wants 
and refusing to allow him to have it unless his reason is satis- 
factory to older people. It would be equally unwise to try the 
same plan with grown-ups. We must be rather careful, there- 
fore, in defining a rational standard of living, not to eliminate 
many things which no one is able to give a very good rea- 
son for desiring, but which, nevertheless, are desired with an 
intensity which cannot always be expressed. 

Tools as consumers' goods. The world has undoubtedly lost 
much, in productive efficiency as well as in the joy of living, 
through its failure to appreciate the possibilities in the direc- 
tion of turning tools and other producers' goods into consumers' 
goods. That one must have good tools to do good work has 
long been recognized, but we have scarcely begun to realize the 
full meaning of the term "good tools." It is not only necessary 
that they be capable of doing their purely mechanical work ; 
it is also essential that they please the mind of the worker. They 
must be pleasing to look upon as well as agreeable to the hand. 

The purpose of a tool is to bridge the gap between the worker 
and the object upon which he is working, — to enable him to 
transfer to the object the idea or plan which he has in mind. 
It must therefore fit the mind of the worker as well as his 
hand and his arm. 

The importance of having tools which help to keep the worker 
in an agreeable frame of mind is not so much in the fact that 
he can do more or better work in a given minute or a given 
hour, though there is something in that ; the chief importance 



RATIONAL CONSUMPTION 579 

lies in the fact that he can keep at it for more minutes, more 
hours, more days, and more years. 

Coaxing ourselves to work. Some rare geniuses are able to 
work regularly and all the time, ''taking infinite pains" and 
apparently never tiring. Most of us, however, are desultory 
creatures who have to coax ourselves to work steadily. It is 
easier to coax ourselves to work properly if our tools are such 
as we delight to handle and our workshop is a place where we 
delight to be. 

The writer remembers a venerable farmer who seemed to be 
the very embodiment of the spirit of work. The habits of a life- 
time had got into his very bone and muscle. Work seemed to 
be his chief pleasure and idleness his chief pain. Yet he con- 
fided to the writer that he feared he lacked the moral character 
which was necessary to set a gatepost properly. He knew that 
it ought to be set four feet deep, — that if it were set less deep 
than that, the gate would sooner or later begin to sag and give 
trouble. Yet when he was actually digging the hole he found 
his courage and his determination gradually weakening. When 
it was three feet deep it ''looked deep enough," and unless he 
rallied all his moral force he would stop somewhat short of the 
necessary four feet. As another means of supporting his char- 
acter and encouraging himself to do what he knew he ought to 
do, he never undertook to dig a post hole unless he had all his 
tools in the best possible shape. It was harder to persevere with 
poor tools than with good tools. A new tool in which one takes 
some pride is a great help in such times of moral strain. 

Aside from their effect upon the quantity and quality of the 
work which a person can do, handsome tools contribute their 
share to the sheer joy of living. Those people who are not 
obliged to work have the same need as others for pleasing 
effects. Not having any use for tools or other objects of utility, 
they take to collecting useless objects, somewhat after the 
fashion of the bower bird. That bird, it will be remembered, 
gathers bits of glass, colored string, broken china, bright peb- 



58o PRINCIPLES OF NATIONAL ECONOMY 

bles, and spreads them before her nest, for no purpose, appar- 
ently, except the pleasure of looking at them. Now tools may 
be just as beautiful as the greater number of those useless 
objects which people of leisure and bower birds collect for 
their own delectation. Those who work spend a large portion 
of their time with their tools and in their shops, more than they 
are likely to spend anywhere else except in their own homes. 
Next to the adornment of their homes, the adornment and 
beautification of their working-places must furnish them the 
pleasure of living. 

Pride in work. The spirit which regards work as a more or 
less repulsive necessity — which tries to cover up in many ways 
the evidences of work — is probably responsible for a large part 
of the neglect which we have shown in the case of our working- 
places. Naturally enough a person who regards work merely 
as a disagreeable necessity — something to be ashamed of and 
avoided on every possible pretext — is not likely to spend very 
much money on the polishing or adornment of his tools or the 
beautification of his working-place. 

No rural neighborhood, for example, is quite so desolate as 
that from which people retire as soon as they have accumu- 
lated enough to enable them to live in town. Farmers who 
retire as soon as they can possibly afford to do so are not likely 
to spend much money in adorning their farmhouses or in mak- 
ing the neighborhood attractive. It is only where you find 
farmers who are glad that they are farmers — who expect to 
remain farmers and whose children look forward to the same 
career — that you find the farms, the homes, and the community 
adorned and embellished with the evidences of civilization. 

Absentee ownership. No town or section of a town is gener- 
ally quite so unattractive as the place where the people work. 
It has not occurred to many of the owners of these working- 
places that the people really live there a good portion of their 
lives, and that if they cannot get a part of their joy of living 
there they will miss a good deal of it. No doubt this is due 
partly to the fact that the owners themselves live elsewhere. In 



RATIONAL CONSUMPTION 581 

this respect a factory district resembles a farming district whose 
land is owned by absentee landlords. The surplus which the 
land affords is all spent somewhere else, — where the owner 
lives, — in adorning and embellishing his home; there is none 
left to adorn and embellish the countryside. Similarly, the 
surplus which the factory yields is spent somewhere else, usu- 
ally as far from the factory as the owner and his family can get. 

If it were not for the fact, referred to above, that we have 
inherited certain aristocratic traditions (or else that we try 
to ape those who have) and are rather anxious to get away 
from the sources of our incomes, we might find it possible, in 
some cases at least, to live near our places of business. If we 
all did so we should spend our money there and should also, if 
we could afford it, beautify those surroundings as we now 
beautify the suburban districts where we live. 

What is drudgery ? Even inside of our homes or dwelling- 
places the same tendencies show themselves. When the people 
who can and do appreciate art and beauty all keep servants to 
do the housework, such places as the kitchen, the laundry, and 
the scullery, where the necessary work of the household is done, 
are unattractive places. Adornment is reserved for those parts 
of the house where the family live. Even those people who love 
beautiful things and, at the same time, have to do their own 
household work, .frequently imitate the same customs. It is 
unnecessary to remark that their work seems like drudgery 
because it has to be done under unattractive conditions. There 
are, however, many fine exceptions to this general rule, as in 
the case of the old-fashioned rural kitchen. This noble institu- 
tion could never have developed except among people of intelli- 
gence and taste who cheerfully accepted the fact that work was 
a necessity and tried to make the most of it. There was no 
pretense that living and working could be divorced and no 
desire to keep them apart. There was the frank recognition 
of the fact that life must consist very largely of work, that the 
working-place and the living-place could not be separated, and 
that the joy of life must be derived largely from the working- 



582 PRINCIPLES OF NATIONAL ECONOMY 

place during the working-time. Having once accepted the fact 
that work is a necessity, and having developed customs and 
institutions in harmony with it, there is no further mystery 
connected with the fact that such people took their work cheer- 
fully and that it never occurred to them that it was drudgery. 

Unfashionableness of work. It is astonishing how much of 
the fashion of the world is due to the desire to avoid the ap- 
pearance of having to work, or even to advertise the fact that 
one does not have to work. In ancient times certain Chinese 
magnates used to allow the finger nails to grow to extraordinary 
lengths as a visible sign that they did not have to work. The 
binding of the feet of the girls is said to have had the same 
origin. The train, which only lately was a fashionable ne- 
cessity for every lady in Christendom, answered much the 
same purpose. 

Seeing that we have been so anxious either to avoid work or 
at least to avoid the appearance of having to work, it is not 
strange that we have done very little to make our work agree- 
able. The opposite tendency shows itself once in a while, how- 
ever, as in the case of those New England shoemakers of an 
earlier day who cooperated to hire readers to read to them while 
they plied their trade. Such people cannot be kept down. 
They built up a great shoemaking industry in New England. 
One finds good workmen who delight in nice tools, — tools with 
which it is a pleasure to work, — and who, if they have an 
opportunity, adorn their shops with flowers, A good farmer 
usually likes to work with a handsome team, well groomed 
and well harnessed. The team is to him both a consumers' 
good and producers' good. There is not much doubt that such 
a farmer works more cheerfully and more steadily and finds 
life more enjoyable than if he tried to get along with an ill- 
matched, unattractive team. It is reasonable to suppose that 
we should all do better and more persistent work and get more 
enjoyment out of life if we took some pains to make the con- 
ditions of our work attractive. If this is so, it is a matter of 
great economic importance and one which will contribute to 



RATIONAL CONSUMPTION 583 

the prosperity, strength, and greatness of the nation, and even 
more to the enjoyment of the people. Expenditure for such 
things would form a part of a rational system of consumption. 
But it is important that all such enjoyable consumption should 
be regarded in its true relation to the problems of the national 
life upon which our individual lives depend in the long run. To 
forget its relation to the joy of work and to think of it as 
an end in itself, unrelated to the larger problems of life, is 
to diminish our own value to the nation and, to that extent at 
least, endanger the position of our posterity. 



CHAPTER XLIII 

LUXURY 

Different classes of consumers' goods. Consumers' goods have 
been divided into four classes, according to the kind of desires 
which they are designed to satisfy. They are necessaries, com- 
forts, decencies, and luxuries. This, however, is at best only a 
rough classification. It may seem fairly easy to distinguish 
between necessaries and comforts, and there are doubtless many 
cases where goods are easily classified ; but there are also many 
line cases where it is difficult to determine whether the good 
in question is a necessary or a comfort, or even a decency. 
Another difficulty which tends to obscure the distinction is 
found in the fact that no one, however poor, confines himself 
to necessaries. Part of his expenditure will go for comforts, 
part for decencies, and part even for luxuries. Again, no one, 
however rich, can avoid the buying of necessaries and comforts. 

Necessaries. In a general way we may define necessaries as 
all goods which are required for the maintenance of physical 
health and strength, not only of the mature man but also of his 
family and even of his young children. In discussing what used 
to be called the iron law of wages, it was said that the natural 
wages of labor are made up of those things which are necessary 
in order that the laborer may maintain his health and strength 
and reproduce his kind so as to maintain the supply of labor 
without increase or diminution. Aside from the unwarranted 
use of the word "natural" as applied to this rate of wages, it 
would be impossible to say that such wages would consist en- 
tirely of necessaries. It is quite possible that the laborers might 
demand luxuries and forego the gratification of their domestic 
instinct unless they could get them. In that case wages would 



LUXURY 585 

have to be high enough to provide the laborers with these 
luxuries ; otherwise they would not marry and reproduce their 
kind with sufficient rapidity to keep the supply of labor intact. 
It would, in that state of society, be necessary to pay such 
wages as these, but it could hardly be said that everything 
which these well-to-do laborers consumed could be classified as 
necessaries of hfe. In short, wages which will enable the 
laborer to enjoy comforts, decencies, and luxuries, as well as 
necessaries, may have to be paid in order to keep up the 
supply of labor. 

Comforts. Of these three classes of goods, comforts are the 
most difficult to define. While not absolutely necessary for the 
maintenance of health and strength, still they can hardly be 
dispensed with in any society where life is really worth living. 
A young and vigorous person might, by running to and from 
his work in cold weather, dispense with an overcoat. From his 
point of view an overcoat could hardly be called a necessary, 
and yet it would be a great comfort. Cushions or upholstered 
furniture, spring mattresses, etc., can hardly be called absolute 
necessaries, and yet they would be considered almost indispen- 
sable by the average family. 

Decencies. The dividing line between comforts and decencies 
is likewise obscure. By decencies we mean those articles of 
consumption which the habits or customs of one's neighbor- 
hood or one's class prescribe and without which the individual 
or the family would feel that it could scarcely maintain its posi- 
tion of respectability. In a community where military tradi- 
tions are strong and society tends to be stratified, a military 
officer could almost lose caste if he condescended to ride on a 
street car. In such a community a private carriage would seem 
almost to be a necessary, though according to our definition we 
should call it a decency. Anything which an individual member 
of any class, occupation, or profession would feel ashamed to 
be without would come under our definition. Adam' Smith ^ 
included both decencies and comforts under necessaries and 

iThe Wealth of Nations, pp. 466-467. The Clarendon Press, Oxford, 1880. 



586 PRINCIPLES OF NATIONAL ECONOMY 

gives a very clear description of the difference, as it appeared to 
him in his day, between necessaries and luxuries, the two classes 
into which he divided all consumable goods. 

By necessaries I understand, not only the commodities which are 
indispensably necessary for the support of life, but whatever the 
custom of the country renders it Indecent for creditable people, even 
of the lowest order, to be without. A linen shirt, for example, is, 
strictly speaking, not a necessary of Hfe. The Greeks and Romans 
lived, I suppose, very comfortably, though they had no linen. But in 
the present times, through the greater part of Europe, a creditable 
day-labourer would be ashamed to appear in public without a linen 
shirt, the want of which would be supposed to denote that disgraceful 
degree of poverty which, it is presumed, nobody can well fall into 
without extreme bad conduct. Custom, in the same manner, has 
rendered leather shoes a necessary of life in England. The poorest 
creditable person of either sex would be ashamed to appear in public 
without them. In Scotland, custom has rendered them a necessary 
of Hfe to the lowest order of men, but not to the same order of 
women, who may, without any discredit, walk about barefooted. 
Under necessaries, therefore, I comprehend, not only those things 
which nature, but those things which the established rules of decency 
have rendered necessary to the lowest rank of people. All other 
things I call luxuries, without meaning by this appellation to throw 
the smallest degree of reproach upon the temperate use of them. 
Beer and ale, for example, in Great Britain, and wine, even in the 
wine countries, I call luxuries. A man of any rank may, without any 
reproach, abstain totally from tasting such liquors. Nature does not 
render them necessary for the support of life ; and custom nowhere 
renders it indecent to live without them. 

Marshall^ divides consumers' goods into necessaries, comforts, 
and luxuries, making no special class to be called decencies. 

This brings us to consider the term "necessaries." It is common 
to divide wealth into necessaries, comforts, and luxuries; the first 
class including all things required to meet wants which must be satis- 
fied, while the latter consists of things that meet wants of a less 

^Alfred Marshall, Principles of Economics, pp. 67-69. Macmillan & Co., 
Limited, London (fifth edition), 1907. 



LUXURY 587 

urgent character. But here again there is a troublesome ambiguity. 
When we say that a want must be satisfied, what are the consequences 
which we have in view if it is not satisfied ? Do they include death ? 
Or do they extend only to the loss of strength and vigour? In other 
words, are necessaries the things which are necessary for life or those 
which are necessary for efficiency? , . , 

It may be true that the wages of any industrial class might have 
sufficed to maintain a higher efficiency, if they had been spent with 
perfect wisdom. But every estimate of necessaries must be relative 
to a given place and time ; and unless there be a special interpretation 
clause to the contrary, it may be assumed that the wages will be 
spent with just that amount of wisdom, forethought, and unselfishness 
which prevails in fact among the ind'ustrial class under discussion. 
With this understanding we may say that the income of any class in 
the ranks of industry is below its necess^j^evel, when any increase 
in their income would in the course m/^KL produce a more than 
proportionate increase in their effi^l^^MTonsumption may be 
economized by a change of habits, ^^^^^^stinting of necessaries 
is wasteful. 



Luxuries. Where comforts oteven luxuries have entered 
into the laborer's standard of living, it vi^ould undoubtedly be 
true, as Marshall suggests, that any forcible reduction of wages 
would result in less efficiency on the part of the laborers. From 
the standpoint of either the lawmaker or the employer, there- 
fore, all those things which the customs of the time and country 
give to the laborer must be considered as necessaries. To with- 
hold a portion of the laborer's wages would not result in the 
mere cutting out of a few luxuries from his consumption. He 
would be quite as likely to cut down his consumption of physi- 
cal necessaries as of those things which, from an absolute point 
of view, could be called decencies or luxuries. It is a well- 
known fact that high-spirited people, with social standards 
and traditions to maintain, will, if they find themselves in 
reduced circumstances, deprive themselves of absolute physical 
necessaries of life in order to keep up appearances. This, of 
course, is certain to reduce their efficiency. 




588 PRINCIPLES OF NATIONAL ECONOMY 

While this is a final consideration so far as the employer or 
the lawmaker is concerned, it does not alter the fact that if 
these people could be appealed to on moral or other grounds 
to rationalize their habits of consumption, they would be much 
better off. If they would reduce their consumption of luxuries 
and increase their consumption of the necessaries of life, not 
only their working efficiency but their general economic well- 
being would be improved. ^'Wherefore will ye spend your 
money for that which is not bread?" demanded the prophet. 
He was making his appeal, however, directly to the individual 
and not proposing any control of consumption by law. 

Luxuries have very much the same meaning today as that 
which Adam Smith gave to them. They are articles of con- 
sumption which are not demanded either by the physical health 
and strength of the people or by the rules of society, but are 
wholly matters of individual indulgence. The dividing line, 
however, between decencies and luxuries is still very obscure. 
If a person belongs to a small group of spendthrifts, it may be 
claimed that the rules of his social group compel him to spend 
money lavishly on things which others would regard as pure 
luxuries. He may therefore claim that these are only decencies 
because they are prescribed by the rules of his group or class. 
Instead of accepting the verdict of any special class or set, 
it would seem better to confine our idea of decencies to those 
things which are prescribed by the almost universal consensus 
of opinion of the time and place. Thus, in America, for example, 
it would be almost universally thought to be indecent for men 
and women to appear in public places, even in warm weather, 
without shoes, though there are certain isolated communities 
where this rule would not prevail. Before the advent of the 
waist shirt it was generally regarded as improper for a man to 
appear at any public place, especially indoors, without a coat. 
That every woman shall possess certain articles of finery is a 
rule even among the poorest of people. It will be better, there- 
fore, if we restrict the definition of decencies to those things 



LUXURY 589 

which society in general, rather than some special clique or 
coterie, prescribes as necessary. 

Stimulating effect of luxury. Economists have been some- 
what divided on the question as to whether a luxury is always 
to be condemned or not. McCulloch^ states that any gratifica- 
tion, however trivial, is necessary if an individual is stimulated 
to work in order to attain it. John Stuart MilP says, ''To 
civilize a savage, he must be inspired with new wants and de- 
sires, even if not of a very elevated kind, provided that their 
gratification can be a motive to steady and regular bodily and 
mental exertion." It is a well-known fact that in certain low 
states of civilization the laborer or the peon is content with so 
few articles of consumption that he will not work efficiently 
or steadily. If by working three days in a week he can earn 
wages enough to support him, in the style to which he is accus- 
tomed, for seven days, he will work only three days in the 
week. It has been generally recognized that the only cure for 
this difficulty is to raise his standard of living and increase his 
wants, so that he will have a motive for regular and steady work. 
Many interesting stories are told of the devices by means of 
which the laborer is induced to work or by which his wife 
is induced to demand more wages of him in order that she may 
provide herself with finery. 

We need not go to backward countries, however, to find 
examples which illustrate precisely the same principle. There 
are men among us who reduce the number of working-hours 
per day for much the same reason. Finding that they can 
earn enough in four hours to support them for twenty-four, 
they choose to work only four hours a day ; that is, they go 
to their offices at about ten o'clock in the morning and stay 
until about two, and spend the rest of the day at the club or 
the golf course. There are still others who find that they can 
earn enough in twenty years to support them for the whole of 

ij. R. McCulloch, The Principles of Political Economy. Edinburgh, 1825. 
2 Principles of Political Economy, Bk. I, chap, vii, § 3. 



590 PRINCIPLES OF NATIONAL ECONOMY 

their lives. They therefore retire from business long before 
their physical and mental capacity has begun to decline, and 
spend the rest of their time in pleasant pursuits. 

Economically speaking, however, all these men, from the 
peon up, are merely choosing between different kinds of luxury. 
To the peon leisure, sport, amusement, and even rest are 
luxuries in which he delights. If his desire for this sort of 
luxury is stronger than his desire for other kinds, he will choose 
this kind. The same is true of the man who cuts down his 
working-day or his working-years. To him leisure, sport, and 
rest are luxuries. If he cares more for these than for such 
alternative luxuries of other kinds as he could secure by work- 
ing longer, he will of course choose these. 

Material and immaterial luxuries. It is true that by choosing 
material luxuries, rather than the immaterial satisfaction of 
leisure and rest, the quantity of material goods which are pro- 
duced and put on the market is increased. The statistics of 
wealth are expanded. The census-taker and the tax assessor 
find more tangible articles of wealth in such a community than 
they would find in one which preferred to take its luxuries 
in the form of leisure. Doubtless all of us who are members 
of a strenuous race, to whom leisure does not seem so very 
desirable, and also of a race which might be malignly charac- 
terized as greedy or gluttonous, having powerful desires for 
material luxuries, think that we have made much the better 
choice. We are therefore much inclined to despise the race 
which chooses otherwise. There is such a thing as a pot calling 
a kettle black. 

A storehouse of labor. There is another argument, however, 
which goes back at least as far as David Hume, to the effect 
that luxuries must be regarded as a storehouse of labor which 
in the exigencies of the state may be turned to the public 
service. This may mean merely that a community which is 
expending a large proportion of its energy in the production of 
luxuries may, in times of great crisis, turn that surplus energy 
into the work of meeting the crisis. In time of war, for in- 



LUXURY 591 

stance, the consumption of luxuries may be cut down, and the 
productive energy, which had been used in the production of 
luxuries, may now be used in the prosecution of the war or in 
the manufacture of munitions and war equipment. This is 
undoubtedly a sound argument so far as it goes. 

In order to put several million men of working-age into the 
army and navy, and more millions into the munition factories 
and navy yards, and others into the mines to produce the raw 
materials, and still others onto the farms in order to increase 
the food production, it is absolutely certain that extra labor 
must be secured from some source. It is fairly obvious that 
there are only two sources from which laborers can be drawn. 
Those who are not working may be put to work, and those who 
are doing unnecessary kinds of work may be put into the neces- 
sary industries. There is no other possibility. The nation 
must therefore look about and see what can be done in these 
two directions. 

Most men of working-age are generally, in our civilization, 
at work doing something which is necessary, convenient, or 
pleasing. A few more women than men are virtually idle, 
though they all probably manage to keep busy at something 
or other. In time of national crisis some of them may work 
in munition factories or take places in the ordinary factories, 
shops, and stores,' displacing men already employed. Those 
who are displaced may then enlist or go into munition factories. 
A much better opportunity is offered in their own homes. 
Every woman who keeps one or more servants and who is able 
to do anything either inside or outside the home may do her 
own housework and discharge her servants. They will then be 
available for the industries whose expansion is made necessary 
by the war. Those who are situated where they can have a 
sizable garden may work advantageously at gardening, but it 
would be of no great advantage unless they took their work 
seriously and did not waste their time on a few struggling 
plants ; that is, unless they did an appreciable fraction of what 
is known as a man's work. 



592 PRINCIPLES OF NATIONAL ECONOMY 

Reducing consumption in times of national crisis. A much 
greater opportunity lies in the closing or cutting down of all 
unnecessary industries and occupations. If every luxury- 
producing industry were closed down, a vast quantity of labor 
would be released. It would then be available either for miH- 
tary purposes or for the production of the necessaries of life. 
Our golf courses, baseball fields, and tennis courts could be 
transformed into farms and gardens. This would add a good 
many acres to the productive land, and, what is vastly more 
important, the players as well as the spectators could be used 
in productive work. These suggestions are enough to indicate 
that considerable changes in the daily habits of the people may 
be necessary whenever a great national crisis is to be met. 

These changes in habits may profitably go much farther. 
The people may economize greatly in their consumption. It is 
amusing to hear some people talk about the waste in American 
life. You would think that the great American garbage pail 
was a veritable gold mine if it could only be profitably worked. 
Doubtless there is some waste there, and it will bear looking 
into; but if we would consume more food and fewer condi- 
ments, relishes, and delicacies, whose real function is to make 
the food palatable, we should reduce the cost of food about one 
half. Starch, in the form of grain, potatoes, or coarse vege- 
tables, is our principal food. To this must be added a very 
moderate amount of protein, fats, and sugar. These, however, 
may also be made to serve the purpose of making the basic 
starchy food. more palatable. Fruits and the finer vegetables 
and salads can be made to serve mainly as relishes. Instead, 
many of us make our meals principally of things which should 
serve as appetizers, relishes, and delicacies, using starchy food 
only as a means of diluting them. It is this habit, rather than 
our garbage pails, with which the French people, who are so 
much wiser in matters of food than we are, find most fault. 
As to clothing, if the people patch and darn it and make it last 
longer, the textile and clothing trades will then have time to 
produce army supplies. Without these changes of habit and 



LUXURY 593 

many others of the same kind, let it be remembered, it is im- 
possible to recruit a great army and navy and at the same time 
increase the production of supplies for the army and navy as 
well as of all the basic necessaries of hfe. 

There are, however, two ways in which these changes may 
be forced upon the people, whether they will or no. If they 
insist on consuming wastefully and spending their money for 
things which are not necessary, while men are being at the 
same time taken out of productive industry, this unbalancing 
of supply and demand will send prices so high that most of the 
people, particularly the poor people, will not be able to buy 
anything but the barest necessaries. The well-to-do may be 
compelled to reduce their consumption and thereby reduce the 
demand upon the undermanned industries; that is to say, 
if the government is wise enough it will put such high taxes 
upon their incomes as to compel them to reduce their consump- 
tion and their purchases. In this case, instead of buying sup- 
plies and hiring men with their money, they will turn it over 
to the government, which will then buy supplies and hire men 
with it. If the taxes are high enough, women will be compelled 
to do their own housework and discharge their servants, men 
will be compelled to close their golf courses and stop going to 
ball games, and everybody will be compelled to buy cheaper 
and more nutritious food and to wear his old clothes longer. 
They must do all these things and a multitude of others in 
a time when the strength of the nation is being put to the 
test and its very life is at stake ; otherwise no nation can 
successfully meet the test of a great crisis. 

The slogan "business as usual" in time of a great war was 
the result of crass ignorance of some of the basic facts of 
economic life. It was sometimes asserted in support of that 
slogan that the only reason why the people were well-to-do was 
that they had been spending their money for the products of 
industry. Therefore, if the people quit spending their money, 
production would be cut off and prosperity destroyed. But a 
little intelligent analysis would have shown that it was not pro- 



594 PRINCIPLES OF NATIONAL ECONOMY 

posed to spend any less money in time of war or to hire any 
less labor than in time of peace. The obvious thing was that 
the energy of the people had to be completely redirected. The 
great purpose of most'people in time of peace is to gratify their 
desires. In time of war the great purpose must be to win the 
war. The energies which had been devoted to the work of pro- 
ducing objects of gratification had to be turned to the work of 
beating the enemy. If everyone had insisted on having as many 
objects of desire and gratification in time of war as in time of 
peace, it would have taken just as many men to produce these 
objects of desire and gratification, and there would have been 
none to spare for defending the country. Instead of spending 
their money directly for their own private purposes, the obvious 
duty of the people was to turn over as much of it as they could 
possibly spare and let the government spend it in purchasing 
war supplies and in paying men to do the few things which are 
supremely needful for the national defense. 

Rapid recovery after a local disaster. Even in cases of great 
local disaster, such as a great fire or earthquake, it has been 
remarked miany times that recovery comes with amazing 
rapidity. In spite of the fact that vast quantities of wealth 
are destroyed, the city soon recovers and becomes apparently 
as prosperous as ever. Luxury is supposed by some to have an 
important bearing on this question. The energy which, before 
the disaster, was spent in producing luxuries is now available 
to be spent in rebuilding what was destroyed. In order to do 
this, however, the people must, for a time at any rate, reduce 
their consumption of luxuries. The individual whose property 
has been destroyed is to that extent poorer than he was before. 
He may borrow capital with which to rebuild, but until the 
debt is paid off, his effective income is considerably reduced. 
He therefore has less money to spend on articles of luxury ; 
he is virtually spending that money on a new building. 

The objection may be raised that the luxury which takes the 
form of leisure would also furnish a fund of energy for the 
meeting of a great national crisis or repairing a local disaster. 



LUXURY 595 

Men who have remained idle, enjoying leisure, may now go to 
work to carry on the war or to rebuild the city which has been 
partially destroyed. This objection is somewhat weak, how- 
ever, because, in the first place, habits of sloth and idleness are 
much more difficult to overcome than habits of lavish consump- 
tion. The sheer inertia of the people makes it almost impos- 
sible to rouse them to extra exertions in time of crisis, whereas 
the people who have been exerting themselves strenuously in 
the production of articles of luxury may, with less difficulty, 
redirect their strenuous energy. In a sense the productive 
machinery of the community is already going. It can be kept 
going and its direction changed more easily than it can be 
started up. 

In the second place, when a community takes its luxury in 
the form of idleness, it is certain to be ill equipped with the 
machinery of production as well as with the technical knowl- 
edge and skill which are necessary to efficient production. 
If it lacks machinery and technical knowledge and skill it 
will not be able to carry on a modern war successfully or to 
repair a local disaster, whereas a community that takes its 
luxury in the form of material goods will have learned in the 
process of production much technical skill and will have 
accumulated vast funds of machinery and tools. If there is 
anything that modern warfare has taught, it is the superiority 
in war of the nation that is thus equipped. The technical skill 
and the machinery which are accumulated for purposes of pro- 
duction may easily be turned to those of destruction, and in war 
the community that is best equipped for the work of destruc- 
tion will win. A nation that habitually takes its luxury in the 
form of material goods and which builds up a vast and well- 
equipped industrial system, with a great deal of scientific 
knowledge and technical skill, has nothing to fear from a nation 
that takes its luxury in the form of leisure. 

Reducing the rate of permanent construction. So far the argu- 
ment seems conclusive in favor of material luxury as against 
immaterial luxury in the form of leisure and idleness. We are 



596 PRINCIPLES OF NATIONAL ECONOMY 

far, however, from a complete justification of luxury in the 
ordinary sense. The community that is in the habit of invest- 
ing its money for the future rather than of buying objects of 
immediate gratification will likewise have a fund of surplus 
energy at its disposal. All the energy which has been devoted 
to permanent construction for the future good of society may, 
in time of great national crisis or local disaster, be redirected 
toward meeting the crisis or repairing the local damage. The 
kind of skill which is necessary to permanent construction is of 
quite as high an order as the kind which is necessary to the 
production of ephemeral articles of consumption. All the ad- 
vantages, in short, which a luxurious community possesses for 
the meeting of a great crisis are also possessed by the thrifty 
community which spends a good portion of its income in dur- 
able construction and in building for future generations. In 
the long run the nation that spends a large portion of its energy 
in permanent construction will have certain advantages over 
the one that consunies luxuriously. If every farmer, for ex- 
ample, should put back into his farm a part of his annual 
income, in the way of improvement of the soil, in ditching, 
draining, fencing, and building, he would be using up surplus 
energy just as truly as if he spent that amount of money in 
luxurious consumption. In time of national crisis he can sus- 
pend, for the time, further building and improvements on his 
farm and have energy to spare for the production of more 
food ; or he can dispense with a certain amount of hired help, 
which will then be available for government purposes. After a 
few generations the nation whose farmers systematically put 
back into their farms a part of their incomes will have much 
better farms and much greater productive power than the 
nation which merely keeps its agricultural wealth intact and 
spends the surplus in luxurious consumption. 

That which applies to farms applies also to factories, shops, 
and all other productive establishments. The community which 
is in the habit of adding to its accumulated wealth in each 
generation by investing a part of its income in tools and in- 



LUXURY 597 

struments for future production will, after the lapse of a few 
generations, be vastly stronger than the community which 
merely keeps its productive power intact and consumes all its 
income. Thus we reach the conclusion that although the luxuri- 
ous consumption of material articles may be very much better 
than the luxurious enjoyment of leisure, nevertheless thrift, 
forethought, and the investment of incomes in instruments for 
future production are better still. He who does less well than 
he can, does ill. Therefore he who consumes luxuriously when 
he might invest productively is doing badly. 



CHAPTER XLIV 
THE CONTROL OF CONSUMPTION 

Sumptuary laws. Luxurious consumption can undoubtedly 
be condemned on economic grounds as being less desirable 
than frugality, forethought, and the investment of funds in 
productive industries arid objects of durable satisfaction. 
Nevertheless it does not follow of necessity that the govern- 
ment should, through sumptuary laws, attempt to repress 
luxury. To prohibit the consumption of articles of luxury 
might very easily take away the motive to industry. If the 
people cannot have expensive commodities they may take their 
luxury in the form of leisure, idleness, and self-amusement. 
This, as we saw in the last chapter, is even less desirable than 
luxurious consumption. If we grant the argument used by 
Mill and others, to the effect that an increase of wants some- 
times has the effect of overcoming the tendency to sloth and 
idleness, it would follow that if the government should make it 
impossible for men to gratify these increased wants, it would 
merely drive the people back into sloth and idleness. This 
could be counteracted only by other laws, compelling them to 
work, which would be a kind of slavery. Even the slogan 
'^ Necessaries for all before luxuries for any," while good enough 
in itself, would be a very difficult policy to enforce. It is quite 
possible that the many will secure more necessaries if the con- 
spicuously capable producers are allowed some luxuries as a 
motive to production at their full capacity. In other words, if 
the most capable producers are limited by authority to the 
necessaries of life, which they could easily earn with a fraction 
of their time, they are likely to take their luxuries in the form 
of leisure, thus limiting their production of necessaries or their 

598 



THE CONTROL OF CONSUMPTION 599 

performance of useful services. In this case the poor would 
have fewer necessaries than if the capable producer were 
allowed adequate motivation for working to his full capacity. 

Legislative control not always effective. One of the last 
things that we learn regarding legislation is that it usually takes 
a large number of new legislative acts to correct or counteract 
the unlooked-for results of any legislative act. Another objec- 
tion to legislative attempts to suppress luxurious consumption 
is the one pointed out by Adam Smith and others, to the effect 
that when their habits of life are fixed, men and women will 
frequently give up the necessaries of life before they will give 
up luxuries. This applies especially to the attempts to make 
luxuries expensive by taxing them. When they become very 
expensive some people will insist on having them even if it 
takes their whole income to buy them and leaves them little 
for the necessaries of life. 

These arguments, it will be noticed, are based upon the in- 
efficiency of sumptuary laws rather than upon any more funda- 
mental objection to them. In general they seem to produce 
results which are worse than the thing they try to cure. Noth- 
ing whatever can be said, however, against a voluntary fore- 
going of luxuries and a rationalizing of standards of living on 
the part of the people themselves. It is one thing for the people 
to want the right things ; it is quite a different thing to try to 
force them to consume the right things whether they want them 
or not. It is one thing for the people voluntarily to give up 
luxuries ; it is quite a different thing to compel them by law to 
do so, whether they are willing or not. 

Control of vice is "sumptuary legislation." In some extreme 
cases, however, a luxury becomes so extremely demoralizing 
and dangerous to society as to justify government regulation 
or suppression. There may be undesirable results of such legis- 
lation, — there are pretty certain to be ; but if these undesirable 
results are less undesirable than the thing which is suppressed, 
there is a net gain. Regulation or suppression of vice of all 
kinds is a kind of sumptuary legislation. If the vicious habit 



6oo PRINCIPLES OF NATIONAL ECONOMY 

or the vicious form of consumption is sufficiently injurious its 
suppression is justifiable, even though some undesirable results 
may follow its suppression. 

There are, however, a good many sentimental objections to 
sumptuary laws which have no connection with the real objec- 
tions. We are all consumers, and if the government begins 
regulating consumption we are each of us likely to come in for 
a certain amount of regulation. We are rather impatient of all 
kinds of regulation when it is applied to ourselves, though we 
may be very patient in regard to the regulation of other people, 
as we are patient in the contemplation of other people's troubles. 
We are not all of us in the banking or the railroad business, 
and do not feel in danger when the government undertakes to 
regulate those and other special lines of business. 

No essential difference between controlling business and 
controlling consumption. This consideration has led to quasi- 
serious attempts to draw a sharp distinction between the regu- 
lation or control of business and the regulation or control of 
consumption. But all such distinctions are trivial. Habits of 
consumption, as stated above, are quite as important to the 
welfare of the nation as are methods of doing business. To 
attempt to regulate or control either is certain to produce unde- 
sirable results. Nevertheless, where the evils, either of unregu- 
lated consumption or of unregulated business, are great enough 
we must have regulation and take our chances with the evils 
and difficulties of regulation. When we forget our own personal 
interests and begin to think in terms of the prosperity, power, 
and greatness of the nation, all our sentimental objection to 
either form of regulation will disappear and we shall begin 
to weigh the evils of lack of regulation against the evils of 
regulation. Whenever the balance turns in favor of regulation 
we shall be ready for it. 

The national rather than the personal point of view. If one 
will look around and see what is going on, one will discover 
that the people who think in terms of nationality rather than 
in terms of self-gratification are just as prone to legislate on 



THE CONTROL OF CONSUMPTION 60 1 

matters of consumption as on matters of business. It is only 
those who think in terms of their own interest who are Hkely 
to make any distinction. Again, regulation, control, or sup- 
pression of the consumption of alcohol is today one of the most 
widespread and democratic movements in the world. Very 
few of those who favor this kind of legislation — generally none 
of those who lead in the movement — have anything personal 
to gain by it. Most of them do not use alcohol, and it does 
them very httle direct harm. The suppression of liquor is 
favored by those who have been here long enough to develop 
a sense of nationality. It is opposed mainly by those who have 
not been here long enough to develop an interest in the future 
prosperity, power, and greatness of the nation. 

Whenever a nation is facing a great crisis in its history; 
when its strength and endurance are being put to a severe test ; 
when, in short, it is fighting for its life as a nation, — the people 
are forced to think in terms of national life rather than in terms 
of individual life. At such times the people find it just as neces- 
sary that the government shall regulate consumption as that it 
shall regulate production. They also find that freedom of 
speech is not more sacred or inviolable than freedom of run- 
ning a business. Military necessity always inaugurates a 
regime of regulation and compulsion. War is compulsory busi- 
ness from beginning to end. When a nation enters upon a great 
war it passes instantly from the realm of gold to the realm of 
iron, — from a realm in which a price list is followed and volun- 
tary agreement is the general rule to one in which authority 
is obeyed and compulsion is the general rule. Compulsion is 
likely to apply in all fields of activity, not simply in the field 
of production and business management, of transportation and 
food distribution, but also in the field of consumption and even 
in the field of selling talk for a profit. 

Vice as a selective agent. One of the strongest arguments 
against the public regulation of vice or injurious forms of con- 
sumption is that vice acts as a fool-killer and helps to rid the 
world of those undesirable persons who are unable to withstand 



602 PRINCIPLES OF NATIONAL ECONOMY 

temptation. There is some merit in this argument, and if the 
fool-killer worked with more accuracy than it seems to do, so 
that no one but the guilty individual ever suffered from his 
guilt, the argument in its favor would be very strong. Un- 
fortunately there are not many cases in which the vicious 
individual injures no one but himself. He is quite as likely 
to injure others as himself. If it were true that the in- 
dividual who succumbs to vice never injured anybody else but 
himself, it might be argued with a good deal of reason that 
the best way to get rid of him would be to allow him to destroy 
himself as rapidly as possible, — that by so doing we should in 
the course of time build up a strong race of people, who could 
live in the presence of temptation without injury. In a certain 
primitive state of society, where there was little interdepend- 
ence of parts, all this might be true. In a highly complex 
society, such as that with which we are acquainted, it is not 
true. The individual who succumbs to vice may be a menace 
to the whole community. The danger is not confined to the 
innocent members of his own family, who are of course fre- 
quently reduced to want and humiliation through no fault of 
their own. 

We must keep certain large and tangible facts always before 
us when we are considering questions of this kind. The chauf- 
feur who destroys his dependableness through his own vice may 
occasionally injure himself, but he is rather more likely to 
injure other people. The locomotive engineer who becomes 
incapacitated through any kind of vice or bad habit may 
occasionally destroy himself, but he usually destroys a number 
of others in the process. The motorman, the train dispatcher, 
the surgeon, the drug clerk, and a multitude of others who are 
in responsible positions — and in our interlocking civilization 
we are all coming to hold responsible positions — imperil others 
quite as much as themselves if they ever become irresponsible 
and undependable through drunkenness or any other vice. 

Let us grant for the sake of argument that fool-killers are 
needed to prevent the world from being filled with fools and let 



THE CONTROL OF CONSUMPTION 



603 



us grant also that certain vices function as fool-killers. Still, 
we should have a right to insist that the fool-killers should work 
accurately rather than inaccurately ; that is, that they should 
kill only the fools and not endanger the lives of others. Any- 
thing that works inaccurately works inefficiently, from the 
standpoint of race improvement. 

This may be illustrated arithmetically by means of the 
following tables : 



I 




II 


, 


Ill 




0' 




10" 




10^ 




9 




^ 




9 




8 




8 




8 




7 




7 




7 




6 

5 


■Average 5.5 


5 


•Average 6.6 . 


6 

5 


-Average 7 


4 




^ 




4 




3 




3 




3- 




2 




z 




^ 




I 




r. 




^ ^ 





Let us assume that we have ten individuals, graded numeri- 
cally, according to their relative wisdom or foolishness. At 
the bottom of the scale we rank those graded as i, 2, 3, etc., 
whom we may designate as fools. We ascend through the 
moderately wise to the very wise, whom we will grade as 8, 9, 
and 10, The average of the whole group will be 5.5, as shown 
by the first table. Now let us suppose that an inaccurate and 
ineffective fool-killer is at work, as shown in table 11. In- 
stead of canceling only numbers i, 2, and 3, he cancels i and 2 
and also 4, 6, and 9. Here is a rather wholesale slaughter, 
involving a death rate of 50 per cent, and yet the average is 
raised only from 5.5 to 6.6, This is a pretty heavy price to 
pay for so slight an improvement. If, however, the fool-killer 
worked accurately, as shown in table III, canceling only num- 
bers I, 2, and 3, the average of the survivors is now 7. Here 
we have a much lower percentage of slaughter, resulting in a 
much higher improvement in the average. There is something 



6o4 PRINCIPLES OF NATIONAL ECONOMY 

to be said for a fool-killer that operates so accurately as this. 
There is a great deal to be said against the one that operates so 
inaccurately as the one in table II. 

Now the question is, Does the vice in question operate ac- 
curately or inaccurately? Let us take, for example, the vice 
of drunkenness, and grant that a locomotive engineer who gets 
drunk is very likely to be killed in a train wreck ; but if, at 
the same time, he kills several other people who are not 
drunkards his vice is obviously working rather inaccurately. 
Let us grant that the automobile driver who gets drunk is 
likely to kill himself sooner or later; yet if he kills several 
other people, some of whom are not drunkards, vice is again 
working rather inaccurately and therefore ineffectively. In 
fact, anyone in a responsible position is likely to injure a good 
many other people besides himself if he is addicted to any vice 
that destroys his dependability. 

Any vice which acts so swiftly and so injuriously must seri- 
ously endanger the rest of society and must obviously call for 
public regulation. This applies not simply to the extremely 
injurious forms of consumption known as vice, but to any kind 
of injurious or irrational consumption, such as luxury. In a 
time of national crisis, when every ounce of productive energy 
is needed to meet the situation, he who consumes luxuriously 
is causing the waste of productive energy and is thus inter- 
fering with the success of the nation. In time of war, when 
armies and navies must be raised, ships and munitions manu- 
factured on a vast scale, and food and clothing produced more 
abundantly than ever, the question is always one of econo- 
mizing productive power. To use up any of this power need- 
lessly in the production of luxuries is to take it out of the 
nation's industries and even to threaten national disaster. In 
such times the injury which follows from luxurious consump- 
tion is so desperate as to justify public regulation. Even though 
some injurious results may follow from this regulation, these 
can scarcely be any greater than those which follow the 
unregulated consumption of luxuries. 



THE CONTROL OF CONSUMPTION 605 

In normal times the danger from luxurious consumption is 
not so acute and the need for regulation is therefore not so 
great. In this case we may have to consider whether luxurious 
consumption is more injurious than the efforts to regulate it. 
This consideration, however, applies to all other forms of regu- 
lation and control. There is involved here a question of balance 
of profit and loss. It is highly important that on all questions 
of regulation we balance the accounts carefully. There is 
some cost in the mere extension of government control and the 
consequent multiplication of government offices. This diverts 
men from productive industry into government jobs. Unless 
they can save more to the country through their efforts as 
government officials than they could produce if they were left 
in productive industry, the loss is greater than the profit. 
Again, if through too much regulation legitimate industries are 
discouraged to a degree that more than offsets any saving which 
comes from regulation, there is always a net loss. In the case 
of mild luxuries which work no very serious injury to anybody, 
the general rule has been not to waste any energy by multiply- 
ing government offices in order to suppress them. But in times 
of national crisis the policy with respect even to mild luxuries 
may have to be changed. In normal times as well as in 
times of crisis the injury from certain extreme forms of luxury 
may be so great 'as to justify permanent control, regulation, 
or suppression. 

Luxurious consumption does not increase the demand for labor. 
There can be no doubt, however, that luxurious consumption 
is in itself an injury to the public and particularly to the labor- 
ing classes, however inexpedient it might be for the govern- 
ment to use its power of compulsion to prohibit luxury. There 
is an ancient and nauseous fallacy to the effect that the extrava- 
gance of the rich gives employment to the poor. Nothing 
could be any farther from the truth. The extravagance of the 
rich gives much less employment to the poor than do accumu- 
lation by the rich and their investment in various kinds of pro- 
ductive industry. The individual who buys extravagantly does 



6o6 PRINCIPLES OF NATIONAL ECONOMY 

of course set labor to work producing the objects of extrava- 
gance, but the individual who invests largely also sets labor to 
work producing the buildings, tools, etc. in which he invests. In 
addition to this he adds definitely to the productive power of 
the community. Furthermore, labor must be hired to make use 
of the buildings and the tools, and there is a larger social prod- 
uct out of which to pay their wages. Comparatively speaking, 
therefore, the extravagance of the rich takes away from the 
employment of the poor. From that point of view extravagant 
consumption is a social injury. 

Leisure versus luxury. If, as suggested above, there were no 
ulterior results from the suppression of extravagance, the state 
would be fully justified in such a course ; but if the suppression 
of extravagance produced merely leisure and idleness, instead 
of extravagance, more harm than good would be done. We 
must conclude, therefore, that where a form of consumption 
has become so definitely vicious and injurious to the rest of 
society as to produce more harm than would probably be pro- 
duced by compulsory suppression, suppression must be justified. 
But where, even though it be harmful, it is not more harmful 
than other results which would probably follow from its sup- 
pression, suppression is not justifiable. It must be remembered, 
however, that laws suppressing vice are in a sense sumptuary 
laws. The only difference between these and other sumptuary 
laws lies in the fact that the forms of consumption which they 
attempt to regulate or suppress meet with such general disap- 
proval as to make their suppression popular, whereas in other 
cases the forms of consumption are not universally condemned 
and their suppression is therefore not generally approved. 

Rationing the people. That school of social philosophers who 
hold that all forms of competition are inherently evil, and that 
therefore government compulsion and regimentation should be 
made use of to stop competition, would, if they were consistent, 
desire to begin with sumptuary regulations. As stated in a 
previous chapter, there are three main forms of economic com- 
petition, — competitive production, competitive bargaining, and 



THE CONTROL OF CONSUMPTION 607 

competitive consumption, — and of these three, competitive con- 
sumption is infinitely worse than either of the others. By 
an authoritative standardization of wearing-apparel, food, and 
other articles of consumption we should tend to eliminate this 
worst form of competition. That would involve, of course, the 
organization of society on a semimilitary basis, though the 
object need not be military conflict. It would mean the pre- 
scribing of a satisfactory uniform for all members of the 
community and also of a uniform diet or ration. Houses, fur- 
niture, and other consumable goods as well would have to be 
standardized and prescribed by government regulations. 

There is no doubt whatever that if the people would accept 
this kind of regimentation and work cheerfully under it, we 
should prevent the waste of a vast amount of energy and avoid 
many petty jealousies and heartburnings. Academic costume, 
whatever may be said against it on other grounds, has the advan- 
tage of saving academicians a great deal of perplexity over the 
question "Wherewithal shall we be clothed?" The costumes 
and vestments of certain religious orders answer the same pur- 
pose. There are also many religious sects, of which the Quakers 
of the old school were a good illustration, which have succeeded 
in saving their people from that destructive form of competition 
which strives, first, to outshine one's neighbors in matters of 
dress and, second, not to be outshone by one's neighbors. 

In a time of great national crisis we have many illustrations 
of what people may accomplish in the way of economy and 
effort by putting the whole nation on a fixed ration and also by 
prescribing the manner of dress of each class of the nation. If 
the people would submit cheerfully to similar regulations in time 
of peace, the vast energy which in time of war is devoted to the 
work of destruction could then be turned to the work of pro- 
duction, and industrial progress could proceed at a stupendous 
rate. It is not impossible that at some time in the future there 
may be a real effort on the part of certain ambitious nations 
to economize their energy in this way in order that they may 
increase their strength rapidly in preparation for Armageddon. 



CHAPTER XLV 
THE BATTLE OF THE STANDARDS 

Competitive and cheap standards of living. It has generally 
been taken for granted that the cheap standard of living would 
drive out a dear standard. It is asserted that people who are 
willing to live and multiply on a very small income will always 
tend to displace those who are unwilling to live and multiply 
except on a liberal income. If sheep and cattle are allowed to 
multiply and wander at will over the same pasture, it is plain 
that the sheep will drive out the cattle, not because they are 
superior in value or in fighting-power but merely because they 
are able to nibble closer to the ground and to live where cattle 
would starve. A similar law appears to operate throughout the 
human as well as the animal world. Those who can live on 
the least seem at times to be able to drive out all others by 
eating them out of house and home. 

It must be confessed that there are some facts which seem to 

support this conclusion. The American laborers on the Pacific 

coast find it very difficult to compete, at least in the unskilled 

trades, with the Chinese and the Japanese. On the Atlantic 

seaboard employers of labor have been able to tap various 

reservoirs of cheap labor, first in northwestern Europe and later 

in southern and eastern Europe. These laborers, having been 

accustomed to very small incomes, are able and willing to 

work and multiply on incomes so small as to drive out, at 

once or ultimately, either the American laborers or the foreign 

laborers of a previous immigration. The later immigrants 

drive out the earlier immigrants directly by accepting lower 

wages than the earlier immigrants are willing to accept; they 

drive them out indirectly by multiplying rapidly and thus 

supplying a new stock of labor where the others would refuse 

608 



\ 



THE BATTLE OF THE STANDARDS 609 

to multiply. In many farming communities it is found like- 
wise that foreign-born farmers, who are willing to live on less 
than the American-born farmers, can, if necessary, pay either 
a rent or a price for land which would bankrupt the American 
farmer with his higher cost of living. Thus the land tends to 
pass into the hands of those farmers with the cheap standard 
of living. On the Pacific coast, again, the same tendency shows 
itself. The Chinese and Japanese farmers and gardeners are 
economically able to buy or rent land at a price which an Amer- 
ican farmer with his higher standard of living would find impos- 
sible. Their competition, where they live in large numbers, 
forces the price or the rent of land to a ruinous height from the 
standpoint of an American farmer. 

A cheap standard does not always drive out a dear standard. 
It must be pointed out, however, that not every people with a 
low standard of living has high competing power. The Mexi- 
can peons have as cheap a standard of living as the Chinese 
coolies, and yet they do not compete successfully even with 
Americans, who have a higher standard of living. In other words, 
there must be coupled with a cheap standard of living consider- 
able industrial efficiency. With equal industrial efficiency, the 
race with a cheaper standard of living seems to have the advan- 
tage in economic competition. On the other hand, with an equal 
standard of living; the race with the higher industrial efficiency 
has the same advantage in economic competition. In fact, we 
find that even with a more expensive standard of living, the 
race whose industrial efficiency expands in proportion to its 
cost of living holds its advantage in economic competition. 

Competing power is equal to production minus consumption. 
This brings us back to the formula which was used in a previous 
chapter to express the value of a man: V=P — C. The value 
of a man is equal to his production minus his consumption. By 
his value we mean his value to his race or nation. That which 
he adds to the total resources of his nation in excess of what he 
extracts from those resources is his net contribution to its 
strength. That nation will be strongest, in the long run, whose 



6io PRINCIPLES OF NATIONAL ECONOMY 

average citizen has the highest value in this sense. That na- 
tion will be weakest, in the long run, whose average citizen 
has the lowest value in this sense. But that citizen's value 
may be increased, not simply by reducing his consumption but 
by increasing the difference between his consumption and his 
production. Adding to his production is just as essential as 
keeping his consumption within efficient bounds. 

If we seek a formula which shall express the competing power 
of a whole nation^ it must be very closely related to the formula 
which expresses the value of one of its citizens. That formula 
is CP=P — C ; that is, the competing power of a nation is equal 
to its production minus its consumption. The nation or the 
race in which there is the widest margin between production 
and consumption will win in economic competition against all 
comers. If the American farmer were enough more efficient as 
a producer than the foreign-born farmer to compensate for his 
higher cost of living, he could hold his own indefinitely in 
economic competition. It is not, therefore, the cheap standard 
of living which invariably wins ; it is the efficient standard of 
living. A race with an expensive standard of living, provided 
every dollar of expense adds something to its productive effi- 
ciency, will always win in competition with a race with a cheap 
standard of living. If, however, the expensive standard is made 
expensive merely by the demand for luxuries and means of dis- 
sipation, the race is hopelessly handicapped and must ulti- 
mately lose in competition with other races. But if the cost of 
living is made high by the demand for strength-giving food and 
recreation, for means of mental stimulation, or for books, 
instruments of precision, and other means of technical educa- 
tion, such a standard of living may increase the margin between 
production and consumption rather than diminish it. In that 
case not only can the race possessing such a standard hold 
its own in competition at home but the members of that race 
can go anywhere in the world and hold their own in compe- 
tition against the natives. Such a race will be an expanding, 
colonizing race — wherever its members plant themselves they 



THE BATTLE OF THE STANDARDS 6ii 

will succeed and remain ; whereas, if their standard of living is 
merely expensive without being efficient, they are likely to fail 
as colonizers. 

International competition. A race with a high but inefficient 
standard of living sometimes finds it necessary to protect itself, 
at least within its own boundaries, against the competition of 
races with a cheaper but more efficient standard. Otherwise 
they would find themselves ultimately dispossessed even of 
their land. The race with the cheaper and more efficient stand- 
ard would not only get the jobs in industry but would even- 
tually buy the farms and the businesses at prices which the 
natives would be unable to pay. The natives would give way 
before such a race as inevitably as before an army equipped 
with superior weapons of offense. 

Moreover, the problem is not solved by the mere exclusion 
from our own territory of races with a cheaper and more effi- 
cient standard of living. The conflict is merely changed to 
another field and the outcome postponed to a more remote 
period of time. International competition is just as real as 
individual competition within the nation, though it does not 
seem so real to the average person. In the competition for the 
markets of the world the race with the cheaper and more effi- 
cient standard will have the same advantage as it would have 
in getting jobs or in buying farms and businesses within the 
confines of a given country. 

The race with the expensive or inefficient standard may hold 
certain advantages because of the peculiarities of its geographi- 
cal situation. If it possesses superior soil or superior mineral 
deposits, these physical advantages may compensate, in part at 
least, for the inefficiency of its standard of living and enable it 
to survive in international competition. Superior mineral de- 
posits, however, must ultimately be exhausted. Superior soil 
can be maintained only by wise management. The nation that 
depends upon these material advantages for its future strength 
in international competition must look well to its problem of 
conservation. If it does not, it will eventually lose these advan- 



6i2 PRINCIPLES OF NATIONAL ECONOMY 

tages and then its more expensive standard of living will place 
it under a severe handicap. If so, it need not necessarily perish 
as a nation, but at best it will live at a "poor dying rate." 

Even under conditions of international peace, here is a form 
of international rivalry which will still persist and under which 
the victory must ultimately go to the race or the nation with 
the most efficient standard of living ; that is, to the race or 
nation in which the production of the average person exceeds 
his consumption by the widest margin. 

The real Armageddon. Here is a real Armageddon, the bat- 
tlefield of the nations, — the place for the ultimate contest for 
supremacy among the various races and nations of the earth. 
This is the field where every nation in the world must sooner 
or later be brought to the test and made to battle for its very 
existence. It is a peaceful contest, but none the less deadly 
on that account. Preparedness for this final and ultimate con- 
flict will consist in the study of standards of living and in the 
adoption of such standards and habits as will increase produc- 
tive efficiency to the maximum and reduce the cost of living to 
the lowest point which is consistent with maximum productiv- 
ity. In the interest of this form of preparedness it will be well 
for us to ponder the advice of Pythagoras to his son : "Choose 
those habits which are best; custom will make them the 
most agreeable." 

We may, as suggested above, exclude from our territory races 
with a cheaper standard of living than ours. Even this requires 
a government strong enough to guard its boundaries against this 
form of invasion, — peaceful, but no less deadly than military 
invasion. Without a government strong and willing to exclude 
races with a cheap standard, our laborers and our farmers 
would have to compete with them on our own soil and be driven 
either to sink to their level or to emigrate. Laborers and farm- 
ers, therefore, have quite as great need of a strong territorial 
state as has any other class. But, as already shown, even this 
will not absolutely and throughout all future time protect our 
standard of living against cheap standards. It postpones the 



THE BATTLE OF THE STANDARDS 613 

day of reckoning and gives us a few years or centuries of grace 
in which to rationalize our standard of living and prepare to 
meet, in international trade and other ways, the competition of 
cheap standards. 

The time to begin rationalizing our standard of living. Seeing 
that our people m.ust sometime, in some way, meet on the mar- 
kets of the world the competition of races with a lower standard 
of living than ours, wisdom requires that we begin at once the 
study of the problem of efficient consumption as preparation 
against that day of reckoning. This does not mean, of course, 
that we must ultimately learn to live on as little as they ; but it 
does mean that we must learn to consume such things as to add 
to our productive capacity as much as they cost. In other 
words, it means that if we would survive that competition we 
must ultimately eliminate from our consumption those expen- 
sive things that neither directly nor indirectly add to our 
strength, intelligence, alertness, or willingness to work, to plan, 
to save, to invent, and to invest our energies and our savings 
wisely. The Eighteenth Amendment is doubtless a move in the 
right direction and will give our people an advantage in world 
competition, unless — which is not improbable, for we are an 
inventive people — we straightway invent new forms of waste 
to take the place of the old. 

Household budgets. One of the first things to do in the popu- 
lar study of efficient consumption is to systematize our expendi- 
tures for consumers' goods. Accurate accounting is the key to 
all scientific business management, as the business world has 
long known. It is the key, likewise, to all sound farm manage- 
ment, as our farmers are beginning to learn. It is equally the 
key to all sound or scientific management of the household. The 
first step toward a sound system of household accounts is to 
plan the household budget. Too many people consume in a 
haphazard and inefficient manner because they do not plan in 
advance what they must have, but buy whatever is most con- 
venient or most enticing at the moment when they happen to 
have money to spend, or whatever is urged upon them most 



6i4 



PRINCIPLES OF NATIONAL ECONOMY 



skillfully by salesmen. The recent revival of the study of home 
economics which, as shown in Chapter I, was where the study 
of economics first began, augurs well for the future. It will 
enable more and more of our people to become masters of their 
pocketbooks — making the pocketbook do what they plan that it 
should do, instead of being mastered by it, buying whatever 
it tempts them to buy when it is full and only such things as 
it permits them to buy when it is nearly empty. In other words, 
things will be bought and consumed more and more according 
to an intelligent plan as expressed in a budget and less and less 





Diagram A 



Diagram B 



according to the whim of the moment and the immediate state 
of the pocketbook. The nation whose people lead in this 
kind of rational consumption need have no fear of the com- 
petition of races with cheap standards of living. 

Nothing in excess. The old Greek maxim ^'Nothing in ex- 
cess" expresses in brief form not only a'profound philosophy of 
life but also a specific rule to apply to the consumption of goods. 
The law of balance applies here with peculiar definiteness. 
The well-known principle of diminishing utility, as explained 
in a previous chapter, makes it certain that the last units of 
anything consumed in excess will give a small amount of sat- 
isfaction to the consumer. This may be illustrated by the 
above diagrams. 

Let the amount spent for Commodity A by a given consumer 
be measured on the line OX in Diagram A and for Commodity B, 
by the same consumer, on the line O'X' in Diagram B. Let the 
benefit or satisfaction of consuming each commodity be meas- 



THE BATTLE OF THE STANDARDS 615 

ured on the lines OY and O'Y' in the two diagrams, the curves 
YDX andY'D'X' representing the declining utility of successive 
units purchased as increasing units of money, say dimes, are 
spent for each. If the purchaser spends so much for Commodity 
A as is represented by the line OC and so little for Commodity 
B as is represented by the line O'C, it is apparent that he is not 
spending his money wisely. If he had saved the last dime which 
he spent for Commodity A, he would have lost very little bene- 
fit or satisfaction, — only as much as is represented by the line 
CD, or by a very small surface whose height is approximately 
CD. If that dime were spent for Commodity B it would give 
him a larger benefit or satisfaction, as represented by the line 
CD', or by a surface whose height is approximately line CD' 
and whose base is the same as that of the surface representing 
the loss when a dime less is spent on Commodity A. 

It is scarcely necessary to add that wise consumption includes 
also the elimination of injurious articles of consumption and 
the cultivation of a liking for those that are beneficial. 

COLLATERAL READING 

Marshall, Alfred. Principles of Economics (fifth edition), Book IIL 
New York, 1907. 

WiCKSTEED, Philip. The Common Sense of Political Economy, Book I, 
chap, ii ; Book II, chap! iii. London, 1910. 



PART VII. PUBLIC FINANCE 



CHAPTER XLVI 
TAXATION 

Classification of revenues. The government as distinct from 
the people has needs of its own and must have revenue out of 
which to supply those needs. There are various sources of 
public revenue, but in modern times the chief source has been 
taxation. Henry C. Adams, in his work on finance,^ gives the 
following classification of public revenue : 



Public 
Revenue 



Direct revenue 



Public domains 

Public industries 

Gratuities or gifts, or treasure-trove 

^ Confiscations and indemnities 

r Taxes 

Fees 
Derivative revenue-^ . 

Assessments 

[ Fines and penalties 

f Sale of bonds or other forms of commercial 

Anticipatory revenue < credit 

[Treasury notes 



In former times the public domain was made to supply a 
large part of the revenue for the government. In fact, under the 
feudal system, property in land and something resembling 
public office went together. The king had his own demesne ; 
so likewise did his retainers and all members of the nobility. 
The nobility formed the chief fighting class and likewise the 
administrators of local government, each deriving his income 
from the lands which were granted to him. 

Public industries have not figured very largely as sources of 
public revenue, unless royalties from mines could be put in this 
class. A number of European cities have derived portions of 

iThe Science of Finance, p. 227. New York, 1899. 
619 



62 o PRINCIPLES OF NATIONAL ECONOMY 

their revenue from their own water, gas, and electric-light plants. 
Gratuities and gifts, as well as treasure-trove, are negligible 
sources nowadays. Confiscation and indemnities belong to a 
lower state of civilization, where militancy and the lust for 
conquest prevail. In all civilized governments taxes have be- 
come the chief source of revenue, — fees_, assessments, fines, and 
penalties forming subsidiary sources. 

What is a tax ? A tax is a compulsory payment to the gov- 
ernment for which the latter does not return to the individual 
payer a commodity or a service. The money, for example, 
which one pays for a postage stamp is not a tax ; it is rather the 
means for the purchase of a service. Where a municipality 
owns its own water supply and charges water rates, these rates 
are not in any proper sense taxes ; they are, as in the case of 
the purchase of postage stamps, payments for service. The 
same is true of the price paid for any direct service which the 
public renders. 

To be sure, the government renders general services for all its 
taxes ; but in the case of a tax there is no attempt to apportion 
the payment exacted of the individual to the benefit which he 
as an individual receives. Doubtless everyone receives some 
advantages from the existence of an army or a navy, of courts, 
or of policemen ; but his tax is not of the nature of a purchase, 
since he must pay it whether he thinks he is getting anything 
in return for it or not, and the amount of the tax bears no 
relation whatever to what he thinks the value of the service of 
the state may be to him. 

Some taxes are absolutely compulsory; others are compul- 
sory only conditionally. An income tax, an inheritance tax, or 
a poll tax is absolutely compulsory. The individual has no 
choice in the matter. An excise or a tariff duty may be avoided 
by avoiding the use of the articles on which these duties are 
levied. One may avoid the excise duty on tobacco, for example, 
by refraining from the use of tobacco. And yet when one pays 
this tax, he is not receiving from the government a service, since 
the government did not produce the tobacco but only charges 



TAXATION 62 1 

the manufacturer or the dealer for the privilege of manufac- 
turing and selling. 

So-called indirect taxes. The taxes just described are gener- 
ally called indirect taxes. In case of a tariff duty, for example, 
the importer of the dutiable article pays the tax directly to the 
government. From his point of view it is just as direct as any 
tax. It is the general theory, however, that the consumers of 
the imported articles pay the tax in the form of higher prices. 
In cases where that happens the consumers may be said to pay 
the tax indirectly. This is by no means always the case, how- 
ever, and it is not always easy to determine who does actually 
pay the tariff duty. It is therefore doubtful whether or not the 
term ^'indirect taxation" should be retained in economics. All 
real taxes are direct in the sense that those on whom they are 
levied pay their money directly to the government. In some 
cases, however, the payer is able to shift the tax to somebody 
else by charging a higher price for a product or by paying a 
lower price to the one from whom he himself buys the product. 
The manufacturer of alcoholic liquor pays his excise duty as 
directly to the government as any other tax, but if he charges 
the consumer a higher price for the liquor, the consumer is then 
said to pay the tax indirectly. The manufacturer may also pay 
the producer of the raw materials a lower price, and in that 
case it is the producer who pays the tax, in part at least. If 
the manufacturer carries a part of the burden which he is un- 
able to shift to someone else, he himself bears that burden 
directly, not indirectly. 

Taxes and monopoly price. A common abuse of the word 
"taxation" is to apply it to monopoly price by saying that the 
monopoly taxes the people. It is sufficient in a case of this kind 
to say that the monopoly charges too high a price, or a monop- 
oly price ; it does not add anything to the clarity of the discus- 
sion to bring in the word '^tax." Where the monopoly sells a 
commodity or a service, even though it sells it above cost, the 
individual gets what he thinks ought to be the equivalent of 
what he pays; otherwise he would not have purchased the 



62 2 PRINCIPLES OF NATIONAL ECONOMY 

article. Similarly, the government might, if it chose, charge 
more for postage stamps than the cost of carrying the parcels. 
This would not properly be called a tax ; the proper expression 
would be to say that the government is charging a high price. 

Eliminating compulsion in public business. Even where the 
government derives a part of its revenue from a public industry, 
the element of compulsion is generally present. If the revenue 
from the industry does not pay the expenses, the industry can- 
not become bankrupt and its affairs be wound up by legal pro- 
ceedings. The government can merely tax the people or derive 
an enforced revenue from some other source to pay the deficit ; 
that is, it can use its power of compulsion to keep alive an 
unprofitable industry, whereas an individual or private corpora- 
tion, lacking the power of compulsion, would have no power to 
keep its business alive. 

Again, it will generally be found that the government exer- 
cises some compulsion by excluding competitors from its own 
particular field. No one is allowed to compete directly with the 
Federal post office in carrying first-class mail. The govern- 
ment's power of compulsion is exercised in its own behalf. In 
fact, it is doubtful whether there is a case on record where any 
government has succeeded in doing anything well on a purely 
voluntary basis. It has had to use its power of compulsion at 
some point or other in the enterprise. It has either raised funds 
by compulsion or excluded competitors by compulsion, has re- 
pressed opposition and criticism by compulsion, or in some 
other way made use of this great advantage which it possesses 
over all private organizations in order to insure its success. 

These observations are made not for the purpose of criticiz- 
ing or opposing government enterprise, but merely in the inter- 
est of truth and accuracy. Government is compulsion; and 
when properly exercised, compulsion is beneficent. One of the 
great and really unsettled questions, however, is as to the limits 
within which compulsion is beneficent and beyond which it 
is interference. 



TAXATION 623 

Earmarks of a good revenue system. Henry C. Adams gives 
the following as the marks of a good revenue system : ( i ) It 
must be adequate to the just wants of the state. (2) It must 
present itself as a system and not as an aggregation of independ- 
ent and unrelated acts. (3) In a federated government such as 
we have in the United States the revenue domain of one branch 
of the government should not encroach upon the revenue do- 
main of another in such a way as to bring confusion. In other 
words, there must be harmony and balance between the central 
and local governments, between the local governments them- 
selves, and between the several organizations of local govern- 
ment. (4) It should provide for elasticity of the revenue at 
the point where elasticity is needed ; that is, the revenue must 
be capable of increase and decrease whenever and wherever 
these are needed. 

Double taxation. The second of these is of particular impor- 
tance in the United States of America. Paraphrasing the fa- 
mous rule of the Donnybrook Fair, we have apparently followed 
the rule "Wherever you see a thing, tax it." This has led to a 
great deal of confusion, — to double taxation in some cases and 
to complete escape from taxation in others. By double taxation 
is meant taxing an individual or different individuals twice for 
the same thing. If, for example, a farmer owns a piece of land 
and also has in his possession a piece of paper called a deed to 
the land, and if he is taxed once on the land and again on the 
deed to the land, this is obviously a case of double taxation. 
If, however, one farmer owns a piece of land and another owns 
a mortgage on it, the owner of the mortgage is virtually, if not 
literally, a part owner of the land. If, now, the farmer pays 
taxes on the full value of the land, and the mortgage owner 
pays on the full value of the mortgage, there is an equally clear 
case of double taxation. The double tax really falls on the 
farmer because, where mortgages are taxed, the interest rates 
are made higher in order to recoup the lender for the tax which 
he has to pay. 



624 PRINCIPLES OF NATIONAL ECONOMY 

During the years 191 7 and 1918 our Federal government sold 
large numbers of bonds bearing t,^ per cent interest. One of 
the arguments was that, since they were free from taxation, one 
received practically as much net income as he would receive on 
taxable property yielding nominally 5 per cent but being taxed 
i^ per cent. Where mortgages are not taxed, the same argu- 
ment would apply and would be effective. If in one state a 
lender is compelled to pay a i^-per-cent tax on his mortgage, 
and in another state he does not have to pay any tax, if he is an 
honest man he would as willingly lend at 3^ per cent in the lat- 
ter state as at 5 per cent in the former. If he is dishonest, how- 
ever, he may take his chances on avoiding taxation in the 
former, and if he succeeds he may receive his 5 per cent net. 
Again, where a corporation owns certain amounts of visible 
property, but the shareholders have pieces of paper as evidences 
of their ownership in undivided shares of this property, if the 
visible property is taxed and the individuals are also taxed on 
the pieces of paper which they hold as evidences of ownership, 
the effect is very much the same as though the farmer were 
taxed on his farm and also on the deed, which, like the share in 
a corporation, is only an evidence of ownership. 

Overlapping of tax systems. The third of these marks of a 
good system is also important in this country. The conflict of 
jurisdictions between Federal and state governments, and be- 
tween the state governments themselves, has produced a great 
deal of confusion and also a great deal of double taxation. 
Various remedies for this situation have been proposed, among 
others the subdivision of the various sources of revenue, each 
grade of government to be allowed its own particular source. 
The Federal government, for example, is by the Constitution 
given exclusive right to levy duties on imports. Since no state 
or municipality is permitted to enter this field, there is no con- 
fusion here. It has also been suggested that real-estate taxes 
should be left exclusively to the local governments, — munici- 
palities, counties, and townships. It is thought by certain writers 
that licenses and franchises also should be left exclusively 



TAXATION 625 

to the local governments. Incomes and inheritancies would 
seem to be suitable subjects for state taxation. Stamp taxes of 
various sorts must apparently be left to the Federal government. 

No very clear dividing line has been generally agreed upon 
for the separation of Federal from state sources of revenue. 
Certain writers of high authority hold that the income tax 
should belong exclusively to the states and that the Federal gov- 
ernment should keep out of this field. Their views, however, 
have not received general public support. We already have 
duplication in this field ; that is, in most of our states we have 
income taxes in addition to the Federal income tax. 

Inelasticity of inheritance taxes. The inheritance tax is an 
excellent source of revenue, being very productive ; but it 
should, from the nature of the case, be a permanent tax not 
often to be changed. In the course of a generation practically 
every estate will pass by inheritance and be taxed. But in any 
given year or decade only a certain percentage of them will 
pass by inheritance and be taxed. If, therefore, the tax is 
changed frequently, different estates will bear very different 
burdens. If, during a few years, a very high inheritance tax 
prevails, the few estates that pass by inheritance during those 
years will bear a heavy burden ; and if, during another few 
years, there is a very low tax, the estates which pass in inher- 
itance during those years will bear a very light burden. 

An income tax, however, may be changed frequently without 
injustice to individuals. Everyone who receives a taxable in- 
come is likely to receive it every year. The tax may be changed 
every year without showing any discrimination in favor of or 
against individuals. This would seem to make it necessary that 
an inheritance tax should be permanent and be the source of a 
considerable revenue, but that elasticity should be secured from 
an income tax, which may be changed frequently as occasion 
demands an increase or decrease of public revenue. 

The characteristic form of American taxation, however, is 
what is known as the general-property tax. Nearly every state 
in the Union has had, either in its constitution or on its statute 



626 PRINCIPLES OF NATIONAL ECONOMY 

books, laws requiring the equal taxation of all forms of prop- 
erty. In many cases this has worked to the utter confusion of 
our financial system. One result is that visible property is 
taxed and invisible property escapes. The farmer's land and 
buildings, live stock and machinery, can scarcely be hidden, 
and the assessor finds them. Many of the intangible and in- 
visible forms of property, however, are difficult to find and can 
frequently escape taxation. Strange as it may seem, many 
rural districts show a larger percentage of personal property 
and a smaller percentage of real estate than most of our cities 
because much of the farmer's personal property (machinery, 
tools, etc.) is of a kind that cannot well be hidden. No one 
really believes that farmers own a larger percentage of personal 
property and a smaller percentage of real estate than city 
people, and yet the assessors' books indicate that they do. 

Progressive taxation. Various expedients have been adopted 
to make taxes more just than they are under the crude general- 
property tax. Among these laws one of the most important is 
what is known as the graduated or progressive tax. This may 
apply either to general property, to incomes, or to inheritances. 
The principle of the progressive tax is that the larger the sum 
to be taxed, the higher the rate of taxation. To begin with, 
even an exemption operates to a slight extent as a progressive 
tax. An income tax which exempts, let us say, $2000 from all 
taxation and taxes only the excess above S2000 is slightly pro- 
gressive, even though it is nominally proportional. A tax of 
I per cent on the excess over $2000 would work somewhat as 
follows: on $3000 the tax would be Sio, which is one third of 
I per cent on the whole income ; on $4000 the tax would be $20, 
which is one half of i per cent on the whole income ; on $6000 
the tax would be $40, which is two thirds of i per cent on 
the whole income. 

A genuinely progressive tax, however, proceeds farther than 
this. It begins, let us say, with a i-per-cent tax on the excess 
above $2000, i per cent more on the excess above $10,000, 
I per cent more on the excess above $50,000, and so on. Under 



TAXATION 627 

this scheme, then, the individual who had an income of S6o,ooo 
a year would pay i per cent on $58,000 (the excess above 
$2000), 2 per cent on 5^50,000 (the excess above $10,000), and 
3 per cent on $10,000 (the excess above $50,000), making a 
total of $1880. Whether the tax be an income tax, an inherit- 
ance tax, or a tax on general property, the principle of the 
graduated scale is the same. 

Canons of taxation. Adam Smith, in his '^Wealth of Nations," 
laid down what have since his day been called the canons of 
taxation. They are as follows : 

(i) The subjects of every state ought to contribute towards the 
support of the government, as nearly as possible, in proportion to 
their respective abilities; that is, in proportion to 'the revenue 
which they respectively enjoy under the protection of the state. . . . 
(2) The tax which each individual is bound to pay ought to be cer- 
tain, and not arbitrary. The time of payment, the manner of pay- 
ment, the quantity to be paid, ought all to be clear and plain to the 
contributor, and to every other person. ... (3) Every tax ought to 
be levied at the time, or in the manner, in which it is most likely to be 
convenient for the contributor to pay it. . . . (4) Every tax ought 
to be so contrived as both to take out and to keep out of the pockets 
of the people as little as possible over and above what it brings into 
the public treasury of the state.^ 

The first of these canons relates to the general question of 
justice ; the others are so obviously practical and expedient that 
there has never been any serious discussion of them. A great 
deal of discussion, however, has centered round the first. Just 
what is meant by ''in proportion to their respective abilities" 
has never been definitely decided. At first thought it sounds as 
though this meant proportional rather than progressive, or 
graduated, taxation. If we assume that a man's ability is in 
exact proportion to his income, then obviously if he pays in 
proportion to his ability he must pay in proportion to his in- 
come. But it is contended that a man's ability to pay increases 
more than in proportion to his income, and that therefore if he 

^Adam Smith, The Wealth of Nations, Vol. II, pp. 414-416. 



62 8 PRINCIPLES OF NATIONAL ECONOMY 

pays in proportion to his ability he must pay a progressive, or 
graduated, tax on his income or his property. That there is 
some justification for this opinion is evidenced by the almost 
universal practice of exempting a certain minimum. The indi- 
vidual whose income is barely able to support him and his 
family may be said literally to have no ability to pay taxes, and 
yet he has an income. If this is slightly greater than necessary 
to support him and his family, then he may be said to have 
some ability to pay taxes. This obviously calls for a certain 
degree of progression in the way of taxation. 

Repressive taxation. The tendency is more and more for ex- 
pert opinion to favor some sort of progressive^ or graduated, 
taxation as more just than proportional taxation. Just how far 
in this direction we should go is not easy to determine. It is 
never wise to kill the goose that lays the golden eggs. Neither 
is it ever wise to tax anyone so heavily as to drive him out of 
productive business. If taxes are ever made so heavy upon 
people who are carrying on large enterprises as to discourage 
accumulation, enterprise, and thrift, the state will be doing 
itself an injury. Professor E. A. Ross^ has suggested a new 
canon of taxation to add to the four which Adam Smith gave 
us : A tax should be as little repressive as possible. 

The sum and substance of all sound taxation is that the 
taxes should be as little burdensome as possible. The burden 
of a tax is twofold. There is, in the first place, the disadvan- 
tage to the payer. It is a loss to him to have to give up his 
revenue. In the second place, there is the discouragement 
to enterprise which a heavy tax involves. This is particularly 
disastrous when the government is irregular and whimsical 
in its taxing moods. When producers never know what to 
expect from the government and its tax collectors they have 
little inducement to enterprise. Under such conditions there 
will be little wealth produced for the government to tax, and 
things are likely to go from bad to worse, 

i"A New Canon of Taxation" (abstract), Publications of the American 
Economic Association (1893), Vol. VIII, pp. 49-50. 



TAXATION 629 

In case there are undesirable businesses which the govern- 
ment does not care to prohibit, or undesirable habits which 
it does not care to suppress, the repressive power of taxation 
may be used. Men may then be made either to pay for their 
folly, or to give it up to avoid taxation. In extreme cases com- 
plete suppression is doubtless better than mild repression ; in 
less extreme cases, such as luxurious consumption, ostentatious 
dressing, etc., the mildly repressive effect of a tax is desirable. 



CHAPTER XLVII 

THE SHIFTING OF TAXES ^ 

One of the first lessons that the student of taxation learns 
is that the payer of a tax sometimes shifts the burden in whole 
or in part onto someone else, thus relieving himself, in part at 
least, of the burden. This can come about only in the process 
of buying and selling. The person taxed, in other words, has no 
means of persuading anyone else, as a favor to himself, to assume 
the burden ; he can only charge a higher price for what he has 
to sell, or pay a lower price for what he buys, thus recouping 
himself for what he has paid in the form of a tax. But this mat- 
ter of raising the price of what one has to sell or depressing the 
price of what one has to buy is something which is not so easily 
done as said, as anyone can convince himself by trying it. The 
buyer of what one has to sell and the seller of what one has to 
buy will have something to say about it. Unless the tax affects 
the general conditions of the market in a way which favors the 
payer of it, he will not be able to sell at a higher or buy at a 
lower price, — in other words, he will not be able to shift the tax. 

The shifting of a tax is the process by which the payer re- 
coups himself or gets from some buyer of his product or service, 
or from some seller of what he buys, a sum which will partly or 
wholly cover what he pays in the form of a tax. The one who 
finally bears the burden is said to bear the incidence of the tax, 
or the incidence is said to be upon him. In the present state of 
economic knowledge it is scarcely worth while to attempt the 
task of locating the final incidence of all kinds of taxes. When 
the payer of a tax shifts it upon someone else it is not at all 

iThe substance of this chapter is published in the Yale Review for 
November, 1896. 

630 



THE SHIFTING OF TAXES 631 

improbable that that person will, in turn, shift it onto a third, 
and so on. When the process of shifting a tax is once started, it 
is not easy to tell when or where it will stop or who will bear 
the final incidence. That such knowledge is greatly to be de- 
sired goes without saying. It is a truism that equity in taxa- 
tion consists in distributing the burdens equitably ; but how 
can this be done, even in theory, unless we know where the 
burden will rest? As a step in the process of finding out 
where the incidence will rest, we may begin by examining the 
conditions which will permit a tax to be shifted. 

A tax is shifted only when it affects final values and prices 
so as to enable the taxpayer^ to reimburse himself for the tax 
at the expense of someone else. The shifting of taxes forms a 
special class under the general phenomena of value" and must 
therefore be brought under the general law of value and price. 
The first question to arise is, Under what conditions will a 
tax affect the value of the thing taxed ; or, in other words, bring 
about such a change in the market and such a modification of 
values as to furnish the taxpayer an opportunity to shift the 
burden upon someone else ? 

A tax is no exception to the general law that nothing can 
change the relative value of an article without first changing 
the relation between demand and supply. In order to raise the 
price of anything a tax must either increase the demand or re- 
duce the supply, and to reduce the price it must either decrease 
the demand or increase the supply. A failure to appreciate 
fully the universality and persistency of the law of demand and 
supply lies at the basis of much incorrect thinking on the sub- 
ject of the shifting of taxes. There is a more or less general 
opinion that the value of anything is determined directly by 

^For convenience the following terminology is adopted: The taxpayer is 
the one who pays the tax in the first place, or the one from whom the tax 
collector receives it. The bearer of the tax is the one upon whom the burden 
finally rests. The thing taxed is that upon which the taxpayer's tax is rated, 
or according to which it is estimated. This seems to be in accord with Pro- 
fessor Seligman's idea as set forth in the Political Science Quarterly, Vol. VII, 
p. 715, and also in his "Essays in Taxation," p. 395. 

-See Marshall's "Principles of Economics" (third edition), p. 519. 



632 PRINCIPLES OF NATIONAL ECONOMY 

what it costs, and that as a tax adds to the cost it must there- 
fore be added to the price. This overlooks the true relation of 
cost to value. The cost of anything affects its value only when 
it puts a check upon production and limits the supply.^ When- 
ever an addition to the cost will cause a decrease in the supply 
or an increase in the demand, it will raise the value of the 
article in question. But this will not occur in every case. It is 
scarcely conceivable that a tax can increase the demand for the 
thing taxed. ^ If it ever does so, the instances must be so rare 
that we can safely ignore them. This leaves us to the conclu- 
sion that a tax can raise the price of the thing taxed only when 
it occasions a diminution in the supply. 

Under what conditions will a tax cause a diminution in the 
supply of the thing on which it is levied? Whenever it will 
make the production of any part of the existing supply a source 
of loss to the producer at the existing price. The supply of 
different commodities is determined by wholly different factors. 
In order to arrive at definite conclusions as to the effect of 
taxation upon the supply of different taxable things, it will be 
necessary to adopt the following classification: 

r Persons and incomes 
Taxable | r Land and natural agents 



Things | 

[ Commodities - 



Incapable of 

reproduction 
Monopoly products 
Products of competi-- 

tive industries 



Produced under 

I Products \ Monopoly products increasing re- 

turns 
Produced under 
diminishing 
returns 

Persons and incomes belong in a class by themselves, since 
they are not commodities. If a capitation tax is shifted at all, 
it must be by affecting the price of some commodity which is 

1 Cf . Chapter XXV, What determines the Value of a Thing. 

2 But it may increase the demand for some other commodity by inducing 
people to substitute it for the thing taxed. There are, however, many general 
and indefinite social effects of taxation which need not be discussed under the 
shifting of taxes, since they do not give the taxpayer any special opportunity 
nor any special advantage over the other members of the community. 



THE SHIFTING OF TAXES 633 

inseparately connected with personality. In other words, such 
taxes cannot be shifted unless they either increase the price of 
labor or decrease the price of the necessaries of life. 

It is difficult to see how a general income tax could be 
shifted at all, unless it were made heavy enough to decrease 
saving and reduce the rate of accumulation. A moderate in- 
come tax could not make the possession of an income undesir- 
able, and if it applied proportionally to all incomes it could 
not drive men from one industry to another. If, however, it 
applies only to a special class of incomes, or to those derived 
from certain special sources, it might drive some men out 
of certain occupations. Wherever this results, the diminished 
competition will enable those who remain in these occupations 
to earn more and thus reimburse themselves, in part at least, 
for the tax. When, however, as indicated above, an income tax 
becomes excessive, or when it is so heavily graduated as to 
reduce materially the free incomes of the classes who do most 
of the saving and investing, it is pretty certain to be shifted, 
in part at least, in the form of a higher rate of interest. The 
reason is simple. Those who ordinarily do the saving and in- 
vesting must, of course, do it by consuming only a part of their 
incomes and investing the rest. If their total incomes are 
greatly reduced by a heavy income tax, they must invest less, 
consume less, or both. If they invest less the slower rate of 
accumulation will make it more difficult for new enterprises 
to secure adequate capital. The competition among these en- 
terprises for the limited amount of capital will invariably raise 
the rate of interest. Enterprises that formerly secured all the 
capital they needed at 5 or 6 per cent are likely to have to pay 
7 or 8 per cent, or even more. Our present heavy income taxes 
(1921) undoubtedly have something to do with high rates of 
interest. The only possible way to prevent a scarcity of in- 
vestment capital and a consequent rise in the rate of interest 
is for other classes to become large savers in the aggregate, 
thus supplying the investment funds cut off from former sources 
by the graduated income tax. 



634 PRINCIPLES OF NATIONAL ECONOMY 

A capitation tax necessarily bears most heavily upon the 
poorer classes and may, under certain conditions, enable these 
classes to earn more and thus escape a part of its burden. For 
example, if a certain local community should levy a heavy 
capitation tax it might drive a certain number of the laborers 
elsewhere. If the industries of the place were localized the 
scarcity of labor would enable the remaining laborers to earn 
better wages. But the wider the area over which the tax is 
levied, the more difficult it will be to shift it. What the effect 
of capitation or income taxes will be upon the price of the 
necessaries of life will depend on the use that is made of the 
money that is collected. The probability of such taxes' being 
shifted by causing a reduction in the cost of living seems too 
remote to call for a detailed discussion here. 

Since land and natural agencies are not the products of in- 
dustry, the only way of reducing the supply of these things is 
by causing the abandonment of some portion w^hich is already 
in use or by preventing the appropriation of some portion that 
would otherwise be used. A tax of less than loo per cent of 
the rental value could do neither of these things. Since rent 
is a pure surplus, no individual owner could have any reason 
for abandoning his property so long as the tax collector leaves 
him any part of this surplus. Since such a tax would make no 
difference in the amount of land cultivated, and would not 
change the factors which determine the intensity of cultivation, 
it could not affect the price of the products of the land nor 
raise its rent. From the standpoint of the tenant a given piece 
of land would be neither more nor less desirable on account of 
the tax ; the landlord could collect neither more nor less rent 
and would have to bear the burden of the tax. 

But, on the other hand, the fact that the landlord must 
bear the tax makes land a less desirable kind of property to 
own after the tax is levied than before. This will so diminish 
the demand for land as property as to reduce its selling value 
and enable the future purchaser to shift the future taxes upon 
the present owner. In other words, the latter must bear the 



THE SHIFTING OF TAXES 635 

whole of the future taxes, so far as they can be foreseen/ If a 
certain tax is levied, and it is expected that it will continue to be 
levied indefinitely in the future, it will reduce the selling value of 
the land tn'the amount of the capitalized value of the tax. The 
future owner will therefore be able to buy it so much cheaper 
that he will realize as large a percentage on his investment as 
though the tax had never been levied. Our conclusions are that 
a tax on the rental value of land cannot reduce the supply and, 
therefore, cannot raise its rent. Consequently the owner of the 
land at the time the tax is first levied cannot shift the burden 
at all, but such a tax will reduce the demand for land as prop- 
erty and will consequently lower its selling price. Therefore 
the subsequent purchaser will be able to shift the tax upon the 
one who owned the land at the time the tax was first levied. 

If, however, the tax is specific, and the land is taxed at so 
much an acre without regard to its value, it is almost certain 
that some of the poorer land will not be worth the taxes. 
Where this is the case it will be abandoned and thrown out of 
cultivation. The resulting diminution in the supply of the 
products of land will increase their price and enable the own- 
ers of the better qualities of land to collect a larger rent. 
They will thus be able to shift a portion of the tax upon the 
consumers of the products of the land. 

Those products of human industry which cannot now be re- 
produced form a small and unimportant class which includes 
rare old coins, curios, and works of art. A universal, or world- 
wide, tax would affect them in precisely the same way that it 
would land ; but since they are movable and land is not, a local 
tax would affect them differently. A local tax on such articles 
would have so little effect on their general market price that 
the future purchaser could not have the opportunity of escaping 
the burden by shifting it upon the present owner. 

The supply of monopoly products is limited more or less 
arbitrarily by the will of the monopoly, whose general tend- 

iSee Seligman on the "Shifting and Incidence of Taxation," pp. 52-62, for 
a historical and critical examination of the theory. 



636 PRINCIPLES OF NATIONAL ECONOMY 

ency is to fix the price of its product at the point that will 
yield the largest net return and to limit the supply to such 
an amount as can be sold at that price. A tax on the product 
would necessitate a new calculation of expenses and profits and 
a new adjustment of prices and production to suit the new 
conditions. The price that had yielded the largest net profit 
before a tax was put upon the product would seldom or never 
yield the largest net profit afterwards. A higher price and 
smaller product would ordinarily give better results. Let us 
suppose that a certain article can be produced by a monopoly 
at a uniform cost of four cents a pound. At this price 2,000,000 
Dounds could be sold; at four and a half cents, 1,500,000 
wunds; at five cents, 1,000,000 pounds; at five and a half 
cents, 600,000 pounds ; at six cents, 400,000 pounds ; and at 
six and a half cents, 200,000 pounds. Clearly the monopoly 
would prefer to put the price at five cents and limit the pro- 
duction to 1,000,000 pounds. But if a tax of one-half cent a 
pound were added to the expense a larger net profit would 
remain if the price were put at five and a half or six cents 
and the production limited to 600,000 or 400,000 pounds. 
Therefore, if a monopoly is taxed in proportion to its gross 
product it will shift the tax, in part at least, by charging 
higher prices for its product. 

If the monopoly is taxed in proportion to its net profits, or 
if it is taxed a lump sum regardless of either profits or produc- 
tion, it will have to bear the burden of the tax. In neither 
case could the monopoly gain anything by reducing the amount 
of its production. Such a tax would not change the conditions 
which determine the net profits of the business. 

The supply of commodities that are produced under competi- 
tive conditions is not fixed by nature nor by the arbitrary will 
of a monopoly. The tendency is for the supply to increase 
until the price falls to a level with the cost of producing the 
most expensive increment. If the cost were greater the produc- 
tion would be checked sooner, and there would be a smaller 
supply, which would command a higher price. If the cost were 



THE SHIFTING OF TAXES 637 

lower the production would be checked later, and there would 
be a larger supply, which would have to sell at a lower price. 
The effect of a tax on the production of an article of this class 
would be the same as an addition to the cost of production. 
If the same amount continued to be produced after as before 
the tax was added, it would have to sell at the same price, and 
some of the more expensive increments would then be produced 
at a loss. But this fact alone would make it certain that some 
of the former producers would be driven out of the business, 
and if it were an industry of diminishing returns^ this would 
result in a smaller supply and a higher price. Those who remain 
in the business and continue to pay the tax would thus be able 
to shift a part of the burden upon the consumers of the article. 
But if, on the other hand, the tax were collected directly from 
the consumer rather than from the producer of the article, it 
would make no material difference in the distribution of the 
burden. Such a tax would make the article a less desirable 
possession and w^ould, therefore, diminish the demand -for it. 
This diminution in the demand would lower the price and shift 
a part of the burden back upon the producer. This may be 
illustrated by the diagram on page 638 . 

Let us suppose that the supply of a certain article ie meas- 
ured along the line'O^, and its value and cost of production 
along the line OB. Let GC represent the demand curve and EC 
the cost curve ; in other words, let us suppose that the price 
that could be had for any definite supply of the article is rep- 
resented by the perpendicular distance from the point on OA 
which marks the limit of the supply to the curve GC, and that 
the perpendicular distance from the same point on OA to the 

lit is quite conceivable that a tax on an industry of increasing returns 
might simply drive some of the weaker competitors out of the business and 
enable the survivors to produce on a larger scale and, consequently, more 
cheaply. They might even be able to sell the product at the original price, 
being reimbursed for the tax by the reduction in the cost of production. In 
the absence, however, of satisfactory data this is only a tentative conclusion. 
But where the tax falls on only a part of the competitors, as in the case of an 
import duty on an article that is also produced at home under the law of 
increasing returns, the case is clearer. This will be discussed later. 



638 



PRINCIPLES OF NATIONAL ECONOMY 



curve EC represents the cost of producing the most expensive 
increment of the supply. Obviously, the tendency will be for 
the supply to increase to an amount represented by OD, where 
it would be checked, because a further production would in- 
volve a loss. When the supply is represented by OD the price 
would be represented by OF. But if a tax equal to EE' were 



B 

f' 

F 

f" 

E' 
E 




G 


"""--. -"-" i^^ 




- ^,^'-' - j -- _^^^:^''^p" 







h" D' I 


) 



laid upQn the production of the article it would have the effect 
of raising the cost curve from EC to E'C. This, in turn, would 
have the effect of checking production and limiting the supply 
to an amount represented by OD', and this supply would sell 
at a price represented by OF'. This would shift a part of the 
tax upon the consumer. 

But if the taxes were collected from the consumer, instead 
of the .producer, it would lower the demand curve from GC to 
G'C, check the supply at OD', and reduce the price to OF". 
This would shift a part of the tax back upon the producer. If, 
however, the tax were collected equally from the producer and 
consumer the supply would be reduced to OD"; but the price 
would not be materially changed. We have still to consider 
the case of a tax which is collected upon an article in some ad- 



THE SHIFTING OF TAXES 639 

vanced stage of its production or while it is in the hands of the 
merchant or importer. This will be taken up later. 

According to the foregoing illustration, only a part of the 
tax is shifted in either case ; that is, whether it is originally 
collected from the consumer or from the producer, what the 
effect of the tax will be upon the price of the thing taxed de- 
pends upon two conditions : ( i ) the elasticity of the demand 
for the article and (2) the amount of rent which its production 
affords in proportion to the cost. If, as is the case with com- 
modities for which there are many substitutes, the demand is 
highly elastic it means that a comparatively slight change in 
the price will occasion a considerable change in the amount 
consumed. This gives the consumer a decided advantage in 
the struggle to shift taxes. Other things being equal, the 
consumer will bear a smaller share of the burden when the 
demand for the thing taxed is elastic than when it is inelastic. 
When the demand is elastic the only condition upon which 
he will use the thing at all, or in anything like the usual 
quantities, is that it shall cost him no extra expense. An 
attempt to make the consumer bear the burden of the tax would 
result in a greatly diminished consumption. Consequently the 
producer must either bear the tax or go out of business. But if 
the demand is inelastic, as is the case with commodities for 
which there are few substitutes, the producer has the advantage. 
Other things being equal, the consumer will have to bear a 
larger share of the tax than he would if the demand were elas- 
tic. The additional expense of the tax would not occasion any 
considerable falling off in the amount consumed. 

On the other hand, the elasticity of the production or the 
supply depends upon the extent to which rent enters into the 
production of the article in question. If very little rent is 
afforded, it is because there is very little difference in the 
cost of producing different increments of the supply. If all 
increments are produced at about a uniform cost which ap- 
proximates very closely to the market price, any addition to 



640 PRINCIPLES OF NATIONAL ECONOMY 

the current cost or any subtraction from the current price 
would occasion a considerable falling off in the amount pro- 
duced. Unless the producers could shift a tax they would 
stop producing rather than pay it. So the consumer would 
have to bear a large share of the tax or do without the product. 
But if the production of the article in question affords a large 
share of rent, it is because there is a considerable difference 
in the cost of producing different increments of the supply. 
Where this is the case an addition to the cost or a subtraction 
from the price will occasion a comparatively small diminution 
in the supply. The effects of a tax would be only to cause a 
small diminution in the supply, and the consumer would have 
the advantage.^ Other things being equal, the consumer will 
bear a larger share of the tax when the production of the thing 
taxed affords a small amount of rent than when it affords a 
large amount. For convenience in the following discussion let. 
us agree to use the term "elasticity of production or supply" 
to mean the extent to which a fluctuation in the value or the cost 
of production will affect the amount produced. Thus the pro- 
duction of a given article is highly elastic when a comparatively 
slight addition to the price or subtraction from the cost will 
occasion a considerable increase in the amount produced, and a 
comparatively slight addition to the cost or subtraction from 
the price will occasion a considerable decrease in the amount 
produced. When the opposite conditions obtain, the produc- 
tion is inelastic. Then we can lay it down as a general prin- 
ciple that the distribution of the burden of any particular tax 
on the products of competitive industries depends upon the 
comparative elasticity of the demand and the supply of the 
thing taxed.^ If the demand is' more elastic than the supply, 
the consumer will bear a small share of the tax; but if the 

iThe probabilities are that the tax will come out of the landlord's rent. 

2 It has seemed expedient to avoid the use of such terms as " consumer's rent," 
but to those who are familiar with that term it will readily occur that the 
elasticity of demand depends upon the amount of the consumer's rent which 
the commodity affords, just as the elasticity of supply depends upon the amount 
of producer's rent. 



THE SHIFTING OF TAXES 641 

supply is more elastic than the demand, the consumer will bear 
a large proportion. 

We are now in a position to consider the case of a tax that 
is placed upon an article in some advanced stage of its pro- 
duction or while it is in the hands of the merchant or importer 
on its way from the producer to the consumer. These advanced 
processes of production are the ones which, in general, pro- 
duce the least rent and are affected most by changes in cost 
or value. Therefore it js safe to conclude that such taxes are 
most certain to be shifted. The margin of profit which mer- 
chants, for example, make upon a given commodity of this 
class is so small and so nearly uniform that a tax upon that 
commodity would almost certainly cause them to stop handling 
it unless they could shift the tax. The question is, Will they 
shift it forward upon the consumer in the form of a higher price 
for the finished product or will they shift it backward upon 
the producer of the raw material by paying him a lower price ? 
It is evident that the burden will be shifted in the direction 
of the least resistance. If the demand for the finished product 
is more elastic than the supply, the consumer has power to 
resist effectively the attempt to shift the burden upon him; 
but if the supply is more elastic, the producer has the greater 
power of resistance. Therefore we conclude that the prin- 
ciple of the comparative elasticity of demand and supply, as 
determining the distribution of the burden of taxation between 
producer and consumer, applies to this as well as to other cases. 

A tariff duty on imported commodities is no exception to the \ ^ 
general rule that a tax can affect the value of the thing taxed y^ 
only when it changes the relation of demand to supply. Since 
a tariff duty could scarcely be expected to add anything to the 
demand for the thing taxed, we must conclude that it must 
diminish the supply in the home market if it is to be added to 
the price. In other words, the tariff cannot be shifted upon the 
home consumer unless the effect of the tariff is to reduce the 
supply of the article in the home market. The question is, 
Under what conditions will a tariff duty on an imported com- 



642 PRINCIPLES OF NATIONAL ECONOMY 

modity occasion a diminution in the supply of the article in 
the home market? Let us divide imported commodities into 
the following classes : ( i ) those which cannot be produced at 
home at existing prices ; (2) those which are produced at home 
at existing prices, but whose production is subject to the law 
of diminishing returns ; (3) those which are produced at home 
under the law of increasing returns. 

Any commodity which is produced for a world-wide market 
tends to be distributed among different sections and political 
divisions in such proportions that the producer will realize as 
much net profit on that portion which is sent to one section as 
that which goes to another. If at a given time a larger net 
profit is generally realized on what is sent to one section than 
on what is sent to another, manifestly the producers, if they 
find it out, will begin sending more to one section and less to 
the other until the price is so reduced in the first and increased 
in the second that the profits will be equalized. If a certain 
country levied an import duty upon the commodity in ques- 
tion, and if its price within that country were to remain the 
same as before, it would reduce the profit to the foreign pro- 
ducer upon that part of the product which is sent to that 
country. Less would therefore be sent there and more to other 
countries until the equilibrium was again restored by the crea- 
tion of a new equilibrium price somewhat higher than the old 
one. This diminution in the amount sent to the tariff country 
would raise the price there unless the domestic product increased 
sufficiently to counterbalance the diminution in the amount 
imported. But if it should so happen that the import duty 
should occasion such an increase iij the domestic product as 
to counterbalance the diminution in the amount imported, 
then no rise in the price would result, and the home consumer 
would not have to bear the burden of the duty.^ 

Under what conditions will the domestic product be increased 
by the import duty sufficiently to counterbalance the diminution 

iThis, of course, overlooks local conditions which sometimes exist on the 
border of the tariff country. 



THE SHIFTING OF TAXES 643 

in the amount imported? The utiHty of the above classi- 
fication will now appear. If the duty is levied upon a com- 
modity which cannot be produced at home at the existing price, 
manifestly the home production could not increase sufficiently 
to keep the price from rising. The only condition under which 
it can be produced at home at all is that the price shall rise 
sufficiently to cover the cost of producing it under the unfavor- 
able domestic conditions. In such a case the whole of the duty 
is almost certain to be added to the price. If the commodity 
is one which is produced at home, but under the law of 
diminishing returns, the results will differ only in degree, if 
at all. The price is certain to rise because the amount im- 
ported will diminish, and the domestic product cannot mate- 
rially increase without a rise in price.^ The conditions are 
essentially the same as those illustrated in the diagram on 
page 638. We are safe in assuming that the domestic product 
has already increased as far as it could increase profitably at 
the existing price. Since it is an industry of diminishing re- 
turns, a larger production would involve a higher cost. Poorer 
land, poorer labor, poor managing ability, or all combined would 
have to be called into use, or each existing establishment would 
have to be operated more extensively and, consequently, at a 
greater cost per unit of product. 

Here, again, we may apply the principle of the comparative 
elasticity of demand and supply to determine the extent to 
which such a tax would affect the price, but it must be applied 
in a somewhat special manner. Paradoxical as it may seem at 
first, yet it is true that the more elasticity there is in that part 
of the supply which is produced at home, the less elastic will 
be the whole supply. In other words, the more readily the 
home production will respond to a slight rise in price, the less 
an import duty will affect the whole supply on the home mar- 
ket. The reason is plain. If a slight rise in the price of the 

^It is needless to say that this can apply only to commodities which are 
imported in commercial quantities. It could not apply, for example, to a duty 
on corn and pork in this country ; wool might serve as an example. 



644 PRINCIPLES OF NATIONAL ECONOMY 

article will occasion a large increase in the amount produced 
at home, the home production will come nearer to an increase 
sufficient to offset the falling off in the amount imported. 
That is, the total supply on the home market will be inelastic. 
This will give the consumer an advantage in the matter of 
shifting a tariff duty. He will likewise have an advantage if 
the commodity is one for which the demand is elastic. 

If the duty is levied upon a commodity which is produced at 
home under the law of increasing returns, the result is still 
worse for the foreign producer and correspondingly better for 
the home consumer. A diminution in the amount imported will 
open a larger market to the home producer and may enable him 
to produce more cheaply, because on a larger scale. Where this 
holds true the increase in the domestic product may be more 
than enough to counterbalance the diminution in the amount 
imported and actually increase the total supply on the home 
market. In such a case the consumer would have to bear no 
part of the duty. There are two possible exceptions to this 
conclusion. The first is that an industry of increasing returns 
always tends to be a monopoly. Where such is the case the 
monopoly will doubtless succeed in putting up the price after 
foreign competition is virtually shut out by the import duty. 
But while there is doubtless a tendency for industries of in- 
creasing returns to become monopolies, it can scarcely be main- 
tained that all such industries are monopolies. The second 
exception is that after the import duty had resulted in the 
enlargement of domestic industries and consequent cheapened 
production the price might be still further reduced by remov- 
ing the duty, and that consequently the consumers will be shar- 
ing the burden of the duty in that they would buy the article 
more cheaply if the duty were removed. While this might be 
temporarily true, it is probable that the same forces which 
kept the price up before the duty was first levied would ul- 
timately bring about the same conditions after the duty 
had been removed. 



CHAPTER XLVIII 
THE MINIMUM SACRIFICE THEORY OF TAXATION^ 

If taxes were voluntary contributions for the support of the 
state, it would be important that we should recognize some 
principle by which to determine how much each individual 
ought to give. Since the payment of such a tax and its amount 
would be matters for the individual conscience, it would be 
pertinent to ask what principle of obligation the individual 
ought to adopt as his rule of action. But since taxes are not 
voluntary contributions but forced payments, we need to know 
not so much what the social obligation of the individual is as 
what the social obligation of the state is, — not how much the 
individual ought in harmony with his social obligation to give, 
but how much the state ought in harmony with its own obliga- 
tion to take from him and under what conditions to take it. In 
the matter of taxation the state alone is the voluntary agent, and 
consequently the social obligation of the state alone is to be de- 
termined. It is one thing to say that the individual ought to 
contribute to the support of the state in proportion to the 
benefit which he receives, or to his ability to pay, or to his 
faculty, but it is quite another thing to say that the state ought 
to make him do any of these things. 

These two questions, though distinct, may be resolved into 
one by assuming that it is the duty of the state to make its 
citizens do whatever they ought in conscience to do. It would 
still be the duty of the state which would have to be determined, 
but under such an assumption that duty would be clear when- 
ever we had found out how the individual ought to act. Such 

iThe substance of this chapter was published in the Political Science 
Quarterly, Vol. XIX, No. i (March, 1904). 

64s 



646 PRINCIPLES OF NATIONAL ECONOMY 

was the assumption upon which states acted in an earHer and 
darker age, but it has generally been abandoned except in dis- 
cussions of the basis of taxation, and it is time that it should 
be abandoned even here. 

It is not necessarily the duty of the state to make the indi- 
vidual do whatever he ought to do. In many cases it would cost 
more than it is worth. In some cases, of course, the state 
ought to make the individual do whatever his duty requires, 
as to refrain from violence and fraud, to pay a debt, or to 
keep a contract. In these cases it is so important that the 
individual should do what his duty requires as to more than 
pay the cost of compelling him to do so. But there are many 
other cases where the duty of the state has to be determined 
on other grounds, largely because the state's efforts at com- 
pulsion would do more harm than allowing the individual to 
ignore his duty. It may be that each citizen ought to contrib- 
ute to the support of the Church "according as the Lord hath 
prospered him," but none of the more advanced nations would 
think of trying to compel him to do so. It may be the duty of 
each laborer to join a union, but no state ought to force him 
into one, — much less ought the union to be allowed to appro- 
priate that prerogative of sovereignty to itself. It may be and 
very likely is the duty of each individual "to produce according 
to his ability and consume according to his needs," but no one 
but a socialist would claim that the state ought to try to make 
him do so. To succeed in this would require omniscience and 
omnipotence, and the state possesses neither. It is obviously 
no one's duty to try to do that which he is manifestly incapable 
of doing. This applies to states as well as to individuals. The 
illustrations might be multiplied, but enough has been said to 
show that there are no a priori reasons for assuming that be- 
cause the individual ought to pay for the support of the state 
according to his ability, for example, that it is therefore the 
state's duty to make him do so. All the results of such efforts 
at compulsion must be weighed in the balance before deciding 
to undertake it. 



THE MINIMUM SACRIFICE THEORY 647 

It is not to be inferred that the question of taxation is entirely 
divorced from social utility. Neither is it to be inferred that 
there are two kinds of social obligation — one for the individ- 
ual and the other for the state — nor that the ultimate test 
of social obligation is not the same for the one as for the other. 
A very distinct problem is involved in the question of the appor- 
tionment of taxes ; namely, What ought the state to do in the 
matter ? Moreover, there is only one kind of social obligation ; 
and the same test of action, whatever that test may be, must be 
applied in determining the duties of both the individual and the 
state. But even when a general principle of obligation has been 
agreed upon, no one is in a position to decide upon the specific 
duty of either the individual or the state until he knows what 
would be the general economic consequences of their various 
possible acts. Recognizing that each act is, for his purposes, 
the first link in a chain of causation, he must be able to trace 
that chain from its initial act to its general results before he 
can tell whether or not the act in question conforms to his 
general principle. As applied to taxation, for example, he must 
know how the effort to collect a certain tax will affect indus- 
tries and morals and other social interests before he can 
say whether the state, in levying the tax, would be acting in 
harmony with the general principle of obligation agreed upon. 
If, to be more specific, he should find that the attempt to collect 
a certain tax would discourage certain desirable industries and 
commendable enterprises, that would be at least a partial 
reason for condemning it. That is to say, if the industry 
which is suppressed meets the test of the ethical principle, the 
tax which suppresses that industry cannot possibly meet the 
same test. 

Let us accept, for purposes of this discussion, the principle of 
utility and assume that the state, as well as the individual, 
ought to promote the general welfare — or the greatest good to 
the greatest number. How can the state promote the general 
welfare in the matter of taxation? In discussing its duty the 
author cherishes no illusions as to the nature of the state. 



648 PRINCIPLES OF NATIONAL ECONOMY 

Realizing that the latter is merely an abstraction — a con- 
venient name for certain forms of joint action on the part 
of a multitude of individuals — and that it can have no duties 
separate and apart from those of the individuals who com- 
pose it, yet the duty of the individual in imposing his will 
upon other individuals through legislation is so distinct from 
his duty in other matters that it is much more convenient, and 
fully as accurate, to speak of the former class of duties as if 
they belonged to the state itself. 

The question of the duty of the state in matters of taxation 
is, of course, to be kept distinct from the question of its duty in 
the expenditure of revenue after it is raised. By the expendi- 
ture of a given revenue the state may in various ways add posi- 
tively to the general welfare but it may not be so obvious how 
it can do this merely by collecting revenue. There are cer- 
tain ways of collecting revenue which are generally believed 
— and no doubt correctly — to promote well-being at least 
in a negative way. When, for example, a tax or a license sup- 
presses or holds in check an industry which is regarded as 
more or less deleterious, such a tax or license meets the utili- 
tarian test and is therefore justified. Writers on taxation 
generally (even those who uphold the benefit theory or the 
faculty theory) accept this as a justification, even though it 
does not conform to their special canon of justice. But if the 
general utilitarian principle, or the general-welfare argument, 
can in this special case override their special canon, why may 
it not in other cases as well ? It is at least an admission that 
the general utilitarian test is a more fundamental one than that 
represented by their special canon. If so, the more fundamental 
test ought to be applied in all cases. 

While, as already suggested, there are certain taxes whose col- 
lection adds to the public welfare by suppressing undesirable 
industries, yet, generally speaking, the collection of a tax is in 
itself an evil. It is the cost which we have to undergo for the 
advantages which may be secured by means of the revenue 
after it is collected. Since a tax is, speaking thus generally, an 



THE MINIMUM SACRIFICE THEORY 649 

evil, a burden, a sacrifice imposed, it is obvious that the utili- 
tarian principle requires that that evil, that burden, that sacri- 
fice, shall be as small as possible in proportion to the revenue 
secured. When the taxes are so levied and collected as to im- 
pose the minimum of sacrifice and the revenue is so expended 
as to confer the maximum of advantage, or when the surplus 
of advantage over sacrifice, of good over evil, is at its maximum, 
the state has fulfilled its obligation completely — it has met the 
utilitarian test. 

If it be once admitted that the state's obligation in the mat- 
ter of taxation is to be determined on the basis of a broad prin- 
ciple of public utility, then it is apparent that the argument in 
favor of either the benefit theory or the faculty theory must be 
reconstructed. Instead of basing the argument upon the duty 
of the individual, as is usually done,^ the upholder of either of 
these theories must show that if the state should apportion 
taxes according to benefits received, in the one case, or accord- 
ing to ability to contribute, in the other, such apportionment 
would impose the least burden, all things considered. This is 
possibly the subconscious basis of the arguments of those 
writers who have championed either of these theories, but it 
does not seem to have been explicitly recognized by any of 
them. The champion of the faculty theory, for example, may 
conceivably have reasoned somewhat as follows : 

Major premise. The burdens of taxation ought to be so dis- 
tributed as to involve the least possible sacrifice on the part of 
the community as a whole. 

Minor premise. When each individual contributes in propor- 
tion to his ability, the whole burden of taxation is most easily 
borne ; that is, with the minimum of sacrifice. 

Conclusion. It is the individual's duty so to contribute. 

Granting the premises, the conclusion follows as a matter of 
course, so far as the individual's duty is concerned ; but, as we 
shall see later, the minor premise is not sound and, as we have 

^ If such is not the argument, then the leading expounders of these theories 
are at least guilty of inaccurately expressing their views. 



650 PRINCIPLES OF NATIONAL ECONOMY 

already seen^ the conclusion is not conclusive so far as the duty 
of the state is concerned. For whatever might be true if all 
men were willing to contribute according to their ability, the 
fact is that they are not willing so to do. Being unwilling, they 
will resort to various methods of avoiding such contribution. 
The attempt of the state to compel them to contribute accord- 
ing to their ability will not be without injurious results : it will 
cause various changes in the direction of business enterprise. 
One of the ways of avoiding the necessity of paying a tax is to 
avoid the occasion which the assessor, acting under the law, 
seizes upon as a pretext for collecting a sum of money. If, for 
example, the possession of a certain kind of property offer such 
an occasion, men will tend, within certain limits, to avoid the 
possession of that kind of property. In so far as men generally 
try to avoid the possession of such property or to avoid the 
other occasions for which the assessor is on the lookout, in so 
far, when a new tax is levied, are industry and enterprise dis- 
turbed and forced to readjust themselves to the new pressure. 
These disturbances and readjustments may be more or less in- 
jurious or more or less beneficial. If some taxes are to be 
approved because they repress certain undesirable industries, 
others must, by the same reasoning, be condemned because they 
repress desirable industries. Since almost every tax has some 
effect in determining the direction of business enterprise, it is 
obvious that some consideration of these results of the state's 
action must enter into the determination of its duty. The mat- 
ter is therefore not settled when we have found out what the 
individual ought to do. 

By an argument precisely similar to that in favor of the 
faculty theory of taxation, though somewhat sounder, the social- 
ist could support his claim that the state ought to assume the 
direction of all industry and apportion to each individual his 
work and his income. 

Major premise. The individual ought to work for the eco- 
nomic welfare of the whole people. 



THE MINIMUM SACRIFICE THEORY 651 

Minor premise. If each individual would voluntarily work 
according to his ability and consume according to his needs, the 
economic welfare would be promoted in the highest degree. 

Conclusion. It is the duty of every individual to produce 
according to his ability and consume according to his needs. 

Both the premises are probably sound, and if so the conclu- 
sion follows as a matter of course ; but, like the former conten- 
tion, the argument is inconclusive when applied to the question 
in hand, which is, What ought the state to do ? This question is 
complicated in both cases by the fact that individuals are not 
willing to do what the conclusion points out as their logical duty, 
and that they will therefore adopt methods of avoiding such 
necessity if the state should attempt to impose it upon them. 
Such an attempt would therefore produce unlooked-for and, it 
is generally conceded, highly undesirable consequences. All this 
amounts to saying that it is not the duty of the state to try to do 
anything which it cannot accomplish or in trying to accomplish 
which it would work mischief. What is here affirmed regarding 
the state is equally true of individuals. It is, for example, in 
the opinion of the author, highly desirable that all who read this 
chapter should agree with its conclusions, but even he does not 
consider it anyone's duty to try to force them to do so — for 
the simple and sole' reason that such an attempt could never 
succeed, or that, if it did, it would produce other results more 
undesirable even than disagreement. 

McCulloch alone among the leading writers on taxation seems 
to have grasped this fundamental truth when he wrote : 

It would, no doubt, be in various respects desirable that the in- 
habitants of a country should contribute to the support of its govern- 
ment in proportion to their means. This is obviously, however, a 
matter of secondary importance. It is the business of the legislator 
to look at the practical influence of different taxes, and to resort in 
preference to those by which the revenue may be raised with the 
least inconvenience. Should the taxes least adverse to the public 
interests fall on the contributors according to their respective abilities, 



652 PRINCIPLES OF NATIONAL ECONOMY 

it will be an additional recommendation in their favor. But the 
salus populi is in this, as it should be in every similar matter, the 
prime consideration ; and the tax which is best fitted to promote, or 
least opposed to, this great end, though it may not press quite equally 
on different orders of society, is to be preferred to a more equal but 
otherwise less advantageous tax. 

. . . The distinguishing characteristic of the best tax is, not that 
it is most nearly proportioned to the means of individuals, but that it 
is easily assessed and collected, and is, at the same time, most con- 
ducive, all things considered, to the public interests.^ 

Far from ignoring all ethical considerations, as Bastable 
suggests," this is a distinct recognition of an ethical principle 
more definite and more fundamental than any which Bastable 
himself recognizes in his discussion or shows any signs of being 
aware of. 

Leaving out of consideration for the present all benefits which 
the levying and collecting of a tax may confer, such as the sup- 
pression of an undesirable industry or the deepening of the tax- 
payer's interest in the affairs of the state, let us turn our attention 
to the sacrifices involved. There is, of course, to be considered 
the direct sacrifice on the part of him who pays a tax. Having 
his income curtailed by the amount of the tax, his power to 
consume wealth or to enjoy the use of it is correspondingly re- 
duced. This form of sacrifice is the most prominent and has, 
naturally enough, generally appealed most strongly to writers 
on taxation. But there is also another form of sacrifice quite 
as important and fully as worthy of attention. Any tax which 
represses a desirable industry or form of activity not only im- 
poses a burden on him who pays it but also upon those who are 
deprived of the services or the products of the repressed indus- 
try. Taxes should therefore be apportioned in such a way as 
to impose the smallest sum total of sacrifice of these two kinds. 

While it is essential that both forms of sacrifice should be 
considered before reaching any final conclusion as to the best 

1 Taxation and the Funding System, p. ig. London, 1845. 
^Public Finance, p. 314. London and New York, 1895. 



THE MINIMUM SACRIFICE THEORY 653 

system of taxation, nevertheless the preliminary discussion may 
be facilitated by first treating them separately. If one were 
to consider only the first and more direct form of sacrifice, with 
a view to determining how the total burden of this kind could 
be reduced to a minimum, he would be driven to conclude in 
favor of a highly progressive rate of taxation on incomes, with 
a somewhat higher rate on incomes derived from more perma- 
nent sources, such as secure investments, than upon incomes 
from insecure sources, such as salaries. From the gross income 
which comes to him in the form of a salary the recipient must 
make certain deductions in the way of insurance premiums, 
for example, to provide for the future, before he is on a level, 
in point of well-being, with one whose net income comes to him 
from a permanent investment. The man with a salary of five 
thousand dollars would be no better off than another with an 
income of four thousand from a permanent investment, if the 
former should have to spend one thousand dollars of his salary 
in life-insurance premiums in order to provide as well for his 
family as the latter's family would be provided for by the 
investment itself. Under these conditions the sacrifice involved 
in the payment of an equal amount to the state would be equal, 
though the nominal incomes are unequal. 

Leaving such matters out of consideration, a highly progres- 
sive rate of taxation would be necessary in order to secure the 
minimum of sacrifice, and for the following reasons. In the 
first place, a dollar is worth less, generally speaking, to a man 
with a large income than to a man with a small income, and a 
dollar taken from the former imposes a smaller sacrifice than a 
dollar taken from the latter. Moreover, if after the first dollar 
is taken from the first man his income is still greater than that 
of the second man, the taking of a second dollar will occasion 
him less sacrifice than would the taking of a first dollar from 
the second man ; so that if only two dollars were to be raised 
they should both be taken from the first man. Applying this 
principle rigorously we should continue taxing the largest in- 
come until it is reduced to such a level that the first dollar of 



6S4 PRINCIPLES OF NATIONAL ECONOMY 

the remaining income is worth as much to its owner as the 
first dollar of the next largest income is worth to its owner, and 
then only should we begin to tax the latter at all. Then the two 
should be taxed until they are reduced to a similar level with 
respect to the third largest, before the third largest is taxed at 
all, and so on until a sufficient revenue is raised/ 

Such an application of the principle involves the assumption 
that wants are equal, which, though obviously not true, approxi- 
mates more nearly to the truth than any other working assump- 
tion that could possibly be invented. Since the state must 
collect a revenue, it must have some definite assumption upon 
which it can proceed. The question is not, therefore, whether 
men's wants are equal, but whether there is any rule of inequal- 
ity of wants upon which the apportionment of taxes could be 
made with a nearer approximation to the truth. If there be 
such a rule, it has not yet been discovered. To assume, for 
example, that the man whose income is greater than five thou- 
sand has correspondingly greater wants than the man whose 
income is less than five thousand would be obviously unsafe, 
because there are even chances that the opposite would be true. 
Where the chances are even on both sides it is safer to assume 
equality. Of a given number of men of the same age and the 
same general standard of health (by way of illustration) it 
is obviously untrue to assume that they will all live the 
same number of years, yet it is nearer the truth to assume 
that than any other definite workable principle. Consequently 
the life-insurance company acts justly when it assumes that 
they will live the same number of years and apportions their 
premiums accordingly. 

This in no way ignores the fact that wants expand with the 
opportunity of gratifying them. This objection, however, could 
only apply at the time when the tax was first imposed. At such 
a time it would doubtless be true that the five-thousandth dollar 
taken from a man with an income of ten thousand would occa- 

ipor a fuller discussion of this point see an article by the author on "The 
Ethical Basis of Distribution and its Application to Taxation," in the Annals of 
the American Academy of Political and Social Science, July, 1895. 



THE MINIMUM SACRIFICE THEORY 655 

sion him a greater sacrifice than the taking of the first dollar 
from an income of five thousand dollars would occasion its 
owner. But the reasons for this are twofold. In the first place, 
by taxing the first man so heavily the state would be depriving 
him of so many things which he was accustomed to enjoying 
that by the time the five-thousandth dollar was reached, the 
taking of each particular dollar would be keenly felt. The last 
dollar of his remaining income would represent a greater utility 
to him than would the last dollar of the five-thousand-dollar 
income to its owner. In the second place, by taxing the second 
man so lightly as compared with his present taxes the state 
would be allowing him to consume some things to which he had 
not become accustomed. The taking of the particular dollar 
in question would not involve a very high sacrifice, for the rea- 
son that it would deprive him only of some enjoyment which 
had not yet entered into his standard of living. But both these 
reasons would disappear after the new tax had been in operation 
for a generation, or long enough to bring the standards of living 
of the two men to the same level. 

Drastic as this method of taxation would be, yet, the writer 
contends, this is the method which would be logically forced 
upon us if we should adopt the utilitarian test and should, 
in applying it, have regard only to the direct sacrifice on 
the part of those who pay the taxes, ignoring the indirect forms 
of sacrifice which a system of taxation inevitably imposes. 
John Stuart Mill, who advocated equality of sacrifice as the 
rule of justice in taxation, was guilty of faulty reasoning on 
this point, doubtless because he had not made the analysis 
which subsequent writers have made into the nature of wants 
and their satisfaction. He was too good a utilitarian to advo- 
cate equality of sacrifice if he did not believe that it would in- 
volve the least sacrifice on the whole. This is shown by the 
following quotation, the italics of which are mine. 

For what reason ought equality to be the rule in matters of taxa- 
tion ? For the reason that it ought to be so in all affairs of govern- 
ment. As a government ought to make no distinction of persons or 



6s6 PRINCIPLES OF NATIONAL ECONOMY 

classes in the strength of their claims on it, whatever sacrifice it re- 
quires from them should be made to bear as nearly as possible with 
the same pressure upon all, ivhich, it mud be observed, is the mode 
by which the least sacrifice is occasioned on the whole. If anyone 
bears less than his fair share of the burden, some other person must 
suffer more than his share, and the alleviation to the one is not, 
coeteris paribus, so great a good to him as the increased pressure 
upon another is an evil.^ 

The last proposition in the above quotation would be true 
only of persons whose incomes were approximately equal. If 
A's income is twice as great as B's, or, to state it more accu- 
rately, if A's income were enough greater than B's so that a 
dollar is worth half as much to A as it is to B, then equality of 
sacrifice would be secured by making A pay twice as many 
dollars as B : by collecting $ioo, for example, from A and $50 
from B. But the last dollar of A's remaining income would still 
be worth less to A than the last dollar of B's remaining income 
is worth to B, and the last dollar taken from A would occasion 
him less sacrifice than the last dollar taken from B has occa- 
sioned him. Then by taking more than Sioo^ say Si 10, from 
A, and less than $50, say $40, from B the same revenue would 
be raised with a smaller sum total of sacrifice, for the gain to B 
by this change would be greater than the loss to A. This 
will appear at once to anyone who at all understands the prin- 
ciple of marginal utility. The only conclusion one can draw is 
that the smallest sum total of dissatisfaction is secured not by 
equality of sacrifice but by equality of marginal sacrifice. 
Equality of marginal sacrifice would be secured by so appor- 
tioning taxes that, as a general rule, the last dollar collected 
from one man should impose the same sacrifice as the last dollar 
collected from any other man, though the total amount collected 
from each man might impose very unequal total sacrifices. 

We are now in a position to test the validity of the minor 
premise in the argument on page 651 ; namely, if each indi- 
vidual would voluntarily contribute in proportion to his ability, 

1 Principles of Political Economy, Bk. V, chap, ii, § 2. 



THE MINIMUM SACRIFICE THEORY 657 

the whole burden of taxation could be most easily borne — 
that is, with the minimum of sacrifice. If one's ability is 
assumed to be measured by one's income, real and potential, 
and to vary with that income, then the minimum of sacrifice 
would not be secured by each one's paying according to his 
ability. If the rich would volunteer to pay more than in pro- 
portion to their ability, the burden would be more easily borne 
— that is, with less sacrifice — than if all should pay propor- 
tionally. As a statement of individual obligation, even, the 
faculty theory is untenable, unless modified and defined more 
rigidly than has yet been done. From the strictly utilitarian 
standpoint the individual who measures his obligation to society 
by his total income is less to be commended than the individual 
who determines whether he has fulfilled his social obligations 
by considering not how much he has given but how much he 
has left. The latter type of individual is well illustrated by the 
example of that religious and philanthropic leader who found, 
early in life, that he could live in comfort and maintain his 
maximum efficiency by the expenditure of a certain small in- 
come. Later in life, as his income increased, he continued 
living on his earlier income, devoting all his surplus to the 
service of society. 'This is mentioned merely by way of further 
elucidation of the proposition that if there were no indirect 
consequences of the attempt to collect taxes the utilitarian 
test would require an enormously high rate of progression in 
the apportionment of taxes, and that if the state were able to 
apportion and collect taxes on this basis it would only be making 
individuals do what they ought to do voluntarily. 

But there are indirect results, the most important of which is, 
as already pointed out, the repression of certain desirable 
industries and enterprises. The importance of this considera- 
tion becomes apparent when we reflect on the probable conse- 
quence of a system of taxation so drastically progressive as that 
suggested above. If a large share of one's income above a 
certain sum should be seized by the tax collector, it would tend 
to discourage the effort to increase one's income beyond that 



658 PRINCIPLES OF NATIONAL ECONOMY 

sum. In so far as this reduced the energy of the individual in 
business or professional life, the community would be deprived 
of his services. This deprivation would be a burden on the 
people, all the more regrettable because it would not enricli the 
public treasury in the least.^ 

Such considerations become still more important when we 
come to the discussion of various forms of taxation, especially 
the taxation of various kinds of property. Since different kinds 
of property come into existence in different ways, taxes must 
affect them differently. A kind of property which is produced 
by labor, or comes into being as the result of enterprise, may be 
very seriously affected by a tax. Tax the makers of it and they 
will be less willing to make it. Tax the owners or users of it 
and they will be less willing to own or to use it ; they will there- 
fore pay less for it, and thus discourage the makers of it as 
effectively as if the latter had to pay the tax themselves. In 
either case there will be less of that kind of property made and 
used, and some members of the community who would other- 
wise have enjoyed the use of it will now be deprived of that 
use. This is a burden to them, and, moreover, a burden which 
in no way adds revenue to the state. Such a tax is repressive. 
On the other hand, a kind of property whose existence does not 
depend upon individual labor or enterprise will be less affected 
by a tax. Tax the owner of a piece of land and, while you make 
him less anxious to own it, you will not cause him to abandon 
it. While you lower its price, you do not reduce the amount of 
land nor deprive the community of the use and enjoyment of 
anything which it would otherwise have had. Such a tax is 
not repressive. 

As a general proposition it is safe to say that, other things be- 
ing equal, a tax which represses desirable enterprises or activi- 
ties, and thus deprives the community of the use and enjoyment 
of certain desirable goods, is more burdensome in proportion to 

iSee also Ross, "A New Canon of Taxation," Political Science Quarterly, 
Vol. VII, p. S85. 



THE MINIMUM SACRIFICE THEORY 659 

the revenue raised than a tax which does not entail such results ; 
in other words, a repressive tax is more burdensome than a 
nonrepressive tax. A proposition much more to the point is 
that a tax on any form of property or income which comes into 
being as the result of the productive industry or enterprise 
of its owner is more repressive than a tax on any form of 
property or income which does not so come into being. By 
productive industry and enterprise is meant such industry and 
enterprise as adds something in the way of utility to the com- 
munity and not such as merely costs something to its possessor. 
Skill in buying land may cost as much study and care as skill 
in making shoes; but whereas those who exercise the latter 
kind of skill increase the number of shoes, it has never been 
shown that those who exercise the former kind add anything 
whatever to the community's stock of useful goods. Tax shoe 
factories and, in so far as it represses the industry, the com- 
munity will have fewer shoes ; tax the land and the community 
will not have less of anything than it would have without the 
tax. What is said of a tax on land could also be said, within 
limits, of a tax on inheritances. From the standpoint of non- 
repressive taxation, therefore, both the land tax and the inherit- 
ance tax have much to be said in their favor. 

Anyone who is familiar with the subject of the shifting and 
incidence of taxation will see at once that there is a close con- 
nection between the repressive effects of a tax and the shifting 
of it, A tax can be shifted, generally speaking, only when it 
affects the demand for or the supply of, and consequently the 
value of, the thing taxed. The more easily a tax affects the 
supply or demand, the more easily it is shifted. One which 
does either of these things is repressive : it affects supply by 
repressing production ; it affects demand by repressing con- 
sumption. A careful analysis of the conditions under which 
taxes may be shifted is, therefore, very much to be desired.^ 

ipor an attempt in this direction see the author's article on "The Shifting 
of Taxes," Yale Review, i8q6. See also Seligman's "Shifting and Incidence of 
Taxation " for a brilliant survey of the earlier attempts. 



66o PRINCIPLES OF NATIONAL ECONOMY 

Such an analysis would enable us to form conclusions as to the 
repressive or nonrepressive effects of various taxes. 

As applied to incomes in general, without regard to their 
source, a progressive, even a highly progressive^ tax will occa- 
sion, on the whole, less direct sacrifice to the taxpayers than a 
proportional tax. A progressive tax is therefore to be com- 
mended, unless the rate of progression is made so high as to 
discourage the receivers of large incomes from trying to in- 
crease them. If the rate of progression is as high as this, the 
indirect form of sacrifice, growing out of the repressive effects 
of the tax, will counteract, wholly or in part, the reduction in 
the direct form of sacrifice. A moderately progressive income 
tax would, therefore, seem to be more desirable than a propor- 
tional one. But as between different kinds of income and 
different kinds of property, the preference should be given to 
those taxes which fall upon natural products, such as land, 
rather than upon artificially produced goods, and upon in- 
crements of wealth which come to an individual through natural 
causes over which he has no control — inheritances, for instance 
— rather than upon incomes earned by the individuals them- 
selves. Such taxes are less repressive than most other special 
forms of taxation and therefore occasion less sacrifice of the 
indirect kind. 



CHAPTER XLIX 

THE FINANCING OF A WAR 

It is sincerely to be hoped that it will never be necessary to 
finance another war and that this chapter will therefore have 
nothing more than an academic interest ; but until we have 
reasonable assurance that wars shall be no more, the problem 
of financing a war must have a very practical interest. 

What is meant by the financing of a war. By the financing 
of a war is meant the keeping of the National Treasury sup- 
plied with money with which to purchase military supplies and 
pay other war expenses. This problem should be kept distinct 
from the physical problem of producing supplies and war mate- 
rials. The latter is a problem not for the financial expert but 
rather for the industrial engineer, the business manager, or 
some other expert in the organization and coordination of the 
factors of physical production. While the financial problem is 
one of tremendous importance, it is not only less important 
but also very much less difficult than that of producing the 
supplies themselves. 

Financial problems less difHcult than problems of production. 
Difficult as is the financial problem, all the factors are within 
the control of the government, or at least of the people behind 
the government. Consequently, if they fail in their attempts 
to handle the problem they have only themselves to blame; 
their failure cannot be laid to the physical difficulties or to fac- 
tors which lie beyond their own control. In short, the failure 
will be due to the stupidity of their rulers or of the people who 
refuse to support a sound financial policy on the part of the 
rulers. The problem of producing supplies, on the other hand, 
especially on the part of a beleaguered country, may depend 
upon factors which lie beyond the control of either govern- 

66 1 



662 PRINCIPLES OF NATIONAL ECONOMY 

ment or people. For example, the difficulties of the South 
during the Civil War were on the physical side insuperable, 
hemmed in, as they were, by blockading fleets and invading 
armies. On the financial side, however, their difficulties were 
of their own creation. In other words, the difficulties in the 
way of supplying themselves with horses, salt, nitrogen, and a 
number of other necessaries were insuperable, but the difficul- 
ties which they, as well as the Northern people, had in finding 
money with which to pay for such supplies as they could get 
were within their own control. 

In most of our discussions of the problems of war finance 
too little attention is given to certain large elementary prin- 
ciples. The practical financiers are fully absorbed with the 
details of the question, and the financial writers in the ephem- 
eral press are more concerned with finding out what the people 
want them to say, and then saying it, than they are in getting 
at the root of the problem. 

Speeding up the circulation of money. One large economic 
fact which greatly simplifies the financing of a war is that an 
increase in the rapidity of the circulation of money has, in all 
essential particulars, the same effect as an increase in the physi- 
cal quantity of money. To double the speed of circulation, for 
example, enables a given quantity of money to do twice as much 
work. Analogies, though often dangerous, are sometimes use- 
ful. A helpful one is found between the circulation of blood 
in the human system and the circulation of money in the 
country. When increased muscular exertion calls for larger 
supplies of blood in the limbs, it is not necessary to increase 
the total volume — the need is met by speeding up the circu- 
lation. But in order that the heart may send increasing quan- 
tities of blood per unit of time to those parts where it is 
demanded, it must have means of getting increased quantities 
per unit of time back again from the extremities; in other 
words, the problem of getting the blood back is obviously as 
important as that of pumping it out to the places where it is 
needed. The National Treasury is confronted by a similar 



THE FINANCINC; OF A WAR 663 

problem in time of war. It is called upon to send out money 
in increasing quantities to pay the enormously increased ex- 
penses of the government. In order that it may always have 
sufficient money to pay out for war supplies at an extraordinary 
rate, it must find means of recovering it at the same extraordi- 
nary rate. Since all the money not actually in the Treasury is 
in the hands of the people, it is they who must be induced to re- 
turn it to the Treasury at this extraordinary rate. If the rulers 
can devise a plan for doing this, and if the people are sufficiently 
wise, devoted, and loyal to support the plan, there will be no dif- 
ficulty in the financing of a war. These are two very large ifs. 

More money not absolutely necessary. Another large fact of 
even greater importance is that the country, as distinct from 
its government, does not need very much more money in time 
of war than in time of peace, except for the purchase of foreign 
supplies. So far as its domestic economy is concerned, it needs 
only a little more. There are not many more men to be hired ; 
there is not much more work which can be done, because there 
are not many more men to do it ; and there are not many more 
goods to be bought in time of war than in time of peace. The 
difference is that the government, instead of private individuals, 
must hire the men atnd buy the goods. This makes it physically 
necessary that private individuals should hire fewer men and 
buy fewer goods. 

Private consumption must be cut down. For example, when 
I am spending my income in time of peace I am merely hiring 
men to make things for my consumption and to wait upon me. 
All the men in the country are presumably engaged in produc- 
ing things for consumers and in waiting upon 'them ; that is, 
upon one another. In time of war it is necessary that a large 
number of men stop producing things for private consumption 
and waiting upon one another as private consumers, and begin 
to produce things for the government and to wait upon the gov- 
ernment and serve it as soldiers. It is physically impossible 
for them to do this unless private consumers are willing to con- 
sume less and to wait upon themselves instead of hiring others 



664 PRINCIPLES OF NATIONAL ECONOMY 

to do so. Moreover, it need not take any more money to hire 
these men to work for the government than to hire them to 
work for private consumers. 

If, for example, I am spending so muth on myself that it 
takes, in the aggregate, ten men to make things for my con- 
sumption and to wait upon me, it will be necessary in time of 
war for me to live on less, because the government must have 
some of these ten men. Another way of expressing the same 
thing would be to say that I need them to work for me in 
another capacity in time of war ; I need them to produce war 
supplies and to fight in my defense. The government is my 
agent in hiring these men and directing the fighting ; therefore 
I must turn a part of my income over to my agent, the govern- 
ment, to hire some of these ten men, while I, with the remainder 
of my income, may hire the rest to continue working for me. 
What has just been said in the first person singular can be 
repeated in the first person plural, and thus it will include us all. 

The private consumer bids against the government for man 
power. If we are all left undisturbed in the enjoyment of our 
income and continue spending it in such a way as to require as 
many men as before to produce for and to wait upon each of 
us, while our agent, the government, without taxing us, under- 
takes to find means to hire the men whom it needs, we shall — 
each and every one — be competing for these men against our 
own agent^ the government. If the government opens a war 
chest or gets its money from another source than our incomes, 
it will have to bid against us to get men to work and fight for 
it. Literally, it will be trying with a lot of new money to hire 
them away from us, while we are trying with our full income 
to hire them away from the government and keep them work- 
ing for us. Aside from the obvious futility and stupidity of 
this process, it results in inflation of prices, no matter what the 
source of the government's money may be. 

Taxation enforces economy in private consumption. Here is 
the first great mistake which almost every government has 
made, up to the present time, in its efforts to finance a war : it 



THE FINANCING OF A WAR 665 

has hesitated to tax its people. The only sound method of 
financing a war is to tax the people — and tax them to the bone. 
Unless the government has a war chest which it can open or 
unless it issues a lot of new currency, it must get its money 
from its citizens, in the form either of loans or of taxes. If it 
does not do one of these things, there is no possibility of avoid- 
ing that conflict which has just been described. Leaving the 
people with their incomes and purchasing power unimpaired 
will permit them to continue spending their incomes as be- 
fore, and this expenditure is a demand for men to produce 
supplies for private consumption and to wait upon the con- 
sumers. The only way, then, in which the government can 
get these men is to outbid with its new money the private con- 
sumers. This competition between the private consumers and 
the government for men and supplies cannot by any possibility 
result in anything else than an inflation of prices. 

Issuing new money a mistake. Even when the government 
has accumulated a war chest of specie, this money will be used 
to outbid private consumers for men and supplies, which will 
result in an inflation of prices. Where the government issues 
or causes to be issued a lot of new credit currency, in order to 
avoid taxation, the difficulty is exaggerated, for there is not 
only an inflation but a grave danger of depreciation. 

Contrary to a very widely accepted theory, there may be an 
inflation without any use whatever of credit currency. This is 
possible, for example, where a large quantity of standard coin, 
or metallic money, is injected into the circulation after having 
been hoarded in the public treasury. The way it gets into cir- 
culation at the beginning of a war is through its use by the 
government in purchasing supplies and hiring men ; all the 
private individuals, with their incomes unaffected, continue 
purchasing supplies and hiring men as before; and it is this 
competition of the government, with its new money, against 
private consumers, with their old money, that starts prices 
upward and causes inflation. It makes very little difference 
whether the new money which the government uses in these 



666 * PRINCIPLES OF NATIONAL ECONOMY 

purchases is coin which has been hoarded or credit currency 
which is issued for a special purpose, except where the latter be- 
comes so excessive in quantity as to depreciate in terms of coin. 

Individuals must purchase less if the government is to pur- 
chase more. The first and fundamental conclusion, therefore, 
is that in order to avoid inflation the people must purchase less 
in proportion as the government purchases more. The only 
way to force them to purchase less is to get their money away 
from them. This may be done by several methods as follows : 

The first method is that of voluntary loans of cash. People 
who have been spending their money for other things may be 
induced to spend it for government bonds. They must then 
cut down their purchases of supplies. This reduces the demand 
for men to produce supplies for private individuals. These 
men who are released from general industry are then available 
to be hired by the money which is now in the hands of the 
government. This cannot result in inflation except where the 
government bonds are used as a basis of credit. In this case, 
the purchaser of a government bond, having lent his money 
to the government, then turns around and buys on credit, 
using his bond as security. This results in inflation. 

Another method is that of forced loans, — the commandeering 
of the supplies of money in savings banks and other places of 
deposit. This is virtually the system of conscription as applied 
to money. Whatever else may be said against this method, 
it cannot be said to result in inflation, because the people 
whose money is taken away have less to spend and therefore 
they do not compete with the government in hiring men and 
buying supplies. 

Still another method, and the one which ought always to be 
followed as far as possible, is that of taxation. This is likewise 
a system of conscription, — the conscription of incomes as dis- 
tinguished from that of men. It is better than the forced loan 
because it applies to all incomes and does not penaKze those 
who have shown sufficient frugality and thrift to save and 
deposit a part of their income instead of consuming it all. 



THE FINANCING OF A WAR 667 

The most futile of all methods is that of issuing temporary 
credit currency, to be repaid out of war indemnities after a 
victory. There is, however, one condition under which it may 
be necessary for the government to have available, in the form 
either of a war chest or of a credit currency, a new supply of 
money. It usually takes some months to get the taxing ma- 
chinery going so as to increase the government's income mate- 
rially. It may be necessary, in order to tide over these few 
months, to make use of some extraordinary reservoir of cur- 
rency. Usually, however, and always if the credit of the gov- 
ernment is good, the large sums needed at the beginning of a 
war can be secured quickly by means of voluntary loans. This 
is the first and greatest argument in favor of raising money by 
loans rather than by taxation. 

Distributing the burdens of war over several generations. 
Another argument is that by borrowing the money the financial 
burdens of the war may be distributed over a longer period 
than if the money is raised by taxation. It is sometimes said, 
rather shamelessly it is true, that the people have burdens 
enough in time of war without having to pay extraordinary 
taxes. The fact is, however, that those who do not go as 
soldiers or give thejr services directly to the government bear 
no burdens whatever except taxes. Most of them, in fact, pros- 
per in time of war. Many a respectable family is still living on 
wealth accumulated out of the profits of business during our 
Civil War, and still more out of the World War, while their 
neighbors were spending their time in the unremunerative work 
of the soldier. War is not, in fact, a burden upon the whole 
generation. It is a burden only upon those who do its work and 
those who pay its expenses. If war taxes are not increased, 
many will absolutely escape all war burdens. The question is, 
therefore, that of distributing the burden not over several gen- 
erations but over all the individuals of each generation, and 
distributing it as nearly equally as is humanly possible. 

Distributing the burden between the fighters and nonfighters 
of the present generation. There can be nothing even approach- 



668 PRINCIPLES OF NATIONAL ECONOMY 

ing an equal distribution of the burdens among the individuals 
of the generation that fights the war if some do the fighting 
while others stay at home and enjoy the prosperity of peace 
time. People who complain that they cannot live as well in 
war time as in peace time are apparently unwilHng to bear 
any of the burdens of war whatsoever, even though others 
are sacrificing their lives, while still others are enduring severe 
hardships on very meager pay. The case is still worse when 
some of the people actually prosper more in war time than 
in peace time. In order that there may be even a remote 
approach to equality of sacrifice, those who stay at home must 
be taxed until their burdens begin to approach those of the 
men who go to the front. After this is achieved, and the bur- 
dens of war are distributed among the members of the existing 
generation, is the time to begin to talk about shifting a part 
of the burdens of war onto future generations. If a sincere 
effort is not first made to require all the existing generation 
to bear a part of the cost, the result of shifting the burden to 
the next generation is to enable some to escape altogether and 
others to carry a double burden. It is merely a device under 
which they who go to the front and carry the real burdens are 
then asked to come home — if they do come home — and help 
carry the financial burden by paying the taxes that will be 
needed to recompense those who have lent money to the gov- 
ernment. This is what actually happens when a war is financed 
mainly by borrowing rather than by taxation. 

Purchasing foreign supplies. A third reason for borrowing 
is found in the necessity of purchasing foreign supplies. In 
time of war the national production of articles for private con- 
sumption must necessarily be reduced in order that the country 
may recruit its armies and produce military supplies. Conse- 
quently it cannot send so much produce abroad ; at the same 
time it will, in all probability, need to increase its imports from 
foreign countries. These imports, therefore, must be paid for 
largely with money. In order to meet these foreign payments 
extraordinary sources of monetary supply must be tapped; 



THE FINANCING OF A WAR 669 

literally, the money which is sent abroad for the purchase of 
supplies must be got back again. Since the foreign countries 
cannot be taxed, it must be borrowed back, perhaps over and 
over again, in order to make continual purchases. Here is 
where the credit of the country may be strained. In this case, 
however, the country's financial failure would be due primarily 
to its inability to produce its own supplies rather than to any- 
thing inherent in the problem of war finance. The country 
must either be able to produce its own supplies or else have 
credit enough to buy them from abroad. 

Production of war supplies must be vastly increased. In con- 
sidering the relative merits of taxing and borrowing as means 
of financing a war, we must never lose sight of certain basic 
and incontrovertible facts. One is that if we are to put several 
million men into the army and navy it will be necessary to put 
several million others into the munition factories, shipyards, and 
other establishments for the production of war supphes. We 
must even increase the output of our mines and especially of 
our farms, in order to provide the raw materials and the food 
supplies. All this will require a good many millions of men. 
These men cannot be created out of nothing. 

Sources of additional man power. There are three sources 
from which this additional man power can be drawn. In the 
first place, those who are now at work may work a little harder, 
either by speeding up or by working longer hours. In the 
second place, those who are not now at work may be put to 
work. In the third place, those who are employed in the in- 
dustries which are not indispensable may be withdrawn from 
them in order to expand the industries that are indispensable 
to the prosecution of a war. 

The first two of these sources of man power may be sufficient 
if the war is to prove a trivial affair, but if it is to be a serious 
affair we shall have to draw upon all three, and particularly 
upon the third. It will be absolutely impossible to continue 
running the luxury-producing industries or the industries which 
produce superfluities at the rate which is possible in times of 



670 PRINCIPLES OF NATIONAL ECONOMY 

peace. If the government needs the man power which has 
been engaged in producing luxuries and superfluities, individ- 
uals must perforce cut down their consumption of such things. 
There is no alternative. 

Enforced economy. It will not always be necessary, how- 
ever, for the government by authority directly to forbid us to 
consume these things. This enforced economy will come about 
in other ways. The government must have money with which 
to pay its soldiers and sailors and to buy its munitions and 
supplies. The citizens of the Republic will be called upon 
to supply the government with this money. The money will 
be taken either in the form of taxation or in that of voluntary 
loans. 

Characteristic fallacies. It is necessary, however, to clear 
away certain confusions which arise. The sources of this 
confusion are mainly embodied in the following statements : 
(i) excessive taxation upon consumption will cause popular 
resentment; (2) excessive taxes on industry will disarrange 
business, dampen enthusiasm, and restrict the spirit of enter- 
prise at the very time when the opposite is needed; (3) exces- 
sive taxes on incomes will deplete the surplus available for 
investments and interfere with the placing of the enormous 
loans which will be necessary in any event ; (4) excessive taxes 
on wealth will cause a serious diminution of the incomes which 
are at present largely drawn upon for the support of educa- 
tional and philanthropic enterprises ; ( 5 ) excessive taxation at 
the outset of the war will reduce the elasticity available for 
the increasing demands that are soon to come. 

As to the first of these objections, it is political rather than 
economic. Such a tax as is proposed will cause popular resent- 
ment only on condition that the people are crudely ignorant or 
unpatriotic, — that they are ignorant enough to imagine that 
the expenses of the war can be paid out of nothing or un- 
patriotic enough to be unwilling to bear the necessary burdens 
of the war. Even though the tax should cause popular resent- 
ment, it would not affect in one way or another the economic 



THE FINANCING OF A WAR 671 

wisdom of such a policy. It is one thing to say that a poHcy is 
economically sound ; it is quite a different thing to say that the 
people know enough about economics to understand its sound- 
ness. An autocrat who was trying to determine just how much 
his people would stand might well consider this question. In a 
democracy, however, the people need not stop to ask them- 
selves how much they themselves will stand or whether their 
own voluntary acts would cause resentment in themselves. 

As to the second proposition, it is necessary only to point out 
that a great war, absorbing several millions of men of produc- 
tive age either in the actual fighting or in the production of 
supplies for those who do the fighting, cannot possibly be 
carried on without a good deal of disarrangement of business. 
Moreover, there will be the same disarrangement of business 
whether we turn our money over to the government voluntarily, 
and thus voluntarily cut down our ability to purchase supplies 
for private consumption, or whether we turn the same amount 
of money over to the government in the form of taxes. As to 
the suggestion that heavy taxes will dampen enthusiasm and 
restrict the spirit of enterprise, that is a question of national 
psychology. It is hardly probable that citizens will restrict 
enterprise and havfe their enthusiasm dampened by taxes the 
reason for which they understand and approve. In fact, rea- 
sonably heavy taxes, for a purpose which they understand and 
approve, will probably spur them on to greater effort and en- 
terprise, — will tend to cause them to work longer hours and 
take shorter vacations in order to be able to pay them. 

The third proposition is absurd. The money which is raised 
by taxation will not have to be raised by loans. The only pos- 
sible way in which heavy taxes can interfere with the placing 
of enormous loans is by making these unnecessary. Even with 
the proposed tax, loans will be necessary, but the less there 
is raised by taxation, obviously the more there must be raised 
by loans. 

The fourth proposition has some merit, but it may well be 
asked whether, in a time of great national crisis, even philan- 



672 PRINCIPLES OF NATIONAL ECONOMY 

thropic work which is not connected with the war should not 
be somewhat curtailed. A great deal depends upon how des- 
perate the crisis is. All needless luxuries and every form of 
consumption except those which are indispensable should of 
course be cut off first. If this is done, most of the philanthropic 
work can still be carried on. 

The fifth proposition can mean nothing more than that if 
we tax ourselves to the limit at the start we cannot later on 
increase taxes by as large a percentage as we could if we taxed 
ourselves lightly at the start. True enough ; but it would not 
be necessary. 

People cannot lend more money than there is. One of the 
naive objections to the policy of paying a large proportion of 
the expenses of the war by taxes is that when expenditures 
approach the gigantic sums of present-day warfare such a tax 
policy would require more than the total surplus of social in- 
come. If by social income is meant money income, it will apply 
to loans as well as to taxes. The people cannot turn over to 
the government, either by loans or by taxes, more money than 
they have or can lay their hands upon. They have just as 
much money to pay to the government in the form of taxes as 
they have in the form of loans. The possibilities are exactly 
equal in the two cases. It is only a question as to which is the 
better policy or the better method of getting that money into 
the government treasury. 

If, however, by social income is meant the "products of in- 
dustry and enterprise, the proposition becomes an absurdity. 
No nation can put into a war more than its total surplus over 
and above what is necessary to maintain the life of the people. 
That would be like saying that it is necessary for a country to 
put into the war more than its total man power. 

The real cost of the war cannot be postponed. Another basic 
and indisputable fact which we should bear in mind is that 
the expenses of the war, measured in productive power and 
goods (or measured as all costs must ultimately be measured ; 
namely, in energy expended), will actually be paid as we go 



THE FINANCING OF A WAR 673 

along, whatever our financial policy. Soldiers cannot use guns 
and ammunition nor consume rations which are to be produced 
in the future. Everything that is actually used in the war will 
be produced before it is used ; the cost, in terms of energy, will 
have been paid. In terms of real income, as distinct from 
money income, the war will actually be supported by current 
income ; that is, out of the products of current industry. The 
only question before us is, Where and how will the government 
get the money with which to pay for these things ? It can raise 
it largely by taxation or largely by loans ; in any case it will 
have to use a combination of the two methods. The patriotic 
theory is that it should raise as much as possible by taxation 
and borrow only as a supplementary measure. It would take 
some time to get the taxing machinery in operation, and the 
money which it puts into the treasury would come in gradually. 
At the beginning of a war a large sum must be had at once. 
The only possible way to raise that initial sum is by borrowing. 
The slacker's theory is that the war should be financed as far 
as possible by loans, — that taxes should be increased only in 
order to pay the necessary interest on these loans and such 
other necessary expenses as it seems expedient to pay out of 
the proceeds of the loans. 

Therefore the real question, stripped of all verbiage, is simply 
this, Shall those who stay at home pay for a war as far as pos- 
sible as they go along, or shall they ask the government to 
borrow the money in order that they may not be too much 
disturbed or disarranged and that the others who go to the 
front and do the fighting may help to pay for the war after they 
return home — if they do actually return? 

Keeping money in circulation. It seems to be assumed, on 
the other hand, that money possesses some inherent power of 
production instead of being simply a medium of exchange. 

There is a story of a little girl who decided to spend her mis- 
sionary money for ice cream in order that the ice-cream man 
might have money to give to the missionary cause. There are 
men who try to persuade us that we must do the same thing 



674 PRINCIPLES OF NATIONAL ECONOMY 

in order to raise money for a war. They tell us that unless 
we continue spending our money freely for unnecessary things, 
the sellers of these things will not be able to buy Liberty 
Bonds or to pay war taxes. We are told by others that money 
must be kept in circulation; otherwise our prosperity will be 
destroyed, and without prosperity we cannot finance a war. 

Both these arguments attribute to money a productive power 
which it does not possess. To spend it for unnecessary things 
is to hire men to produce them. As fast as these men can 
be used* in the industries made necessary by a war they are 
needed there. To keep them in the unnecessary industries is 
to interfere with the expansion of the necessary ones. There- 
fore it is pretty clear that during the course of a war, while 
men are badly needed in the necessary industries, it will be 
uneconomical and even criminal for private individuals to 
continue to spend money for unnecessary things. 

But, granting that it is important to keep money circulating, 
something depends upon the channels in which it circulates. 
The dollar which I spend for an unnecessary thing circulates, 
it is true ; but it is equally true that it circulates if I give it 
to the government, the Red Cross, or some other agency 
directly connected with the war, to be spent for some necessary 
thing. So far as mere circulation is concerned there is no 
appreciable difference between the two cases. But something 
else is involved besides this. The productive power which 
creates the unnecessary thing is not so well employed, from the 
standpoint of national economy, as the productive power which 
creates the necessary thing. 

Granting also that it is important to give employment to 
men, something depends upon what they are employed to do. 
To spend a dollar on an unnecessary thing does, it is true, give 
employment to labor, but it is equally true that the same 
dollar spent for a necessary thing would employ the same 
amount of labor. The only question is whether it is better 
to have the labor employed in producing necessary things or 
unnecessary things. 



THE FINANCING OF A WAR 675 

If ^'Business as usual" means merely that we should go on 
doing precisely the same things in time of war as in time of 
peace, it is a palpable absurdity. If it means that everybody 
is to keep as busy as ever or become much busier than ever, it is 
good advice so far as it goes. What we really need to consider 
is. What shall we keep ourselves and others busy doing ? Shall 
we keep ourselves and them busy producing unnecessary things 
or shall we do what we can to keep ourselves and them busy 
doing the necessary things? Obviously the latter. "Busier 
than ever" is a much better motto than ''Business as usual." 

The only way we can possibly keep everybody doing the 
necessary things in war time is, first, to do something our- 
selves which is necessary and, second, to spend all our money 
for necessary things. If we have more money to spend than 
is sufficient to purchase necessary things for our own consump- 
tion, we can either spend the surplus for tools of production 
in some necessary industry (that is, we can invest it) or 
we can turn it over to the government, the Red Cross, or 
some other public agency. This agency can then spend it for 
much-needed other things. 

By all means, therefore, let us keep money circulating in 
war time — not that this in itself means much, but because it 
gives direction to the real productive energy of the country. 
But let us see to it that every dollar which we put into circu- 
lation is put where it will do the most good, — where it will 
direct the productive energy of the country into the necessary 
rather than into the unnecessary industries. 

COLLATERAL READING 

Adams, Henry C. The Science of Finance. New York, 1898. 
Bastable, C. F. Public Finance (third edition). New York, 1917. 
Seligmax, E. R. A. The Shifting and Incidence of Taxation. American 
Economic Association, 1892. 



PART VIII. REFORM 



CHAPTER L 
LABOR PROGRAMS^ 

Four programs. All programs for the improvement of the 
condition of the wageworkers fall into four general classes, 
though there are many combinations and mixtures of these 
four. For the sake of brevity these four classes may be 
arranged as follows : 

I. Programs depending upon voluntary agreements among free 
citizens. 

1. The balancing-up programs. 

2. The collective-bargaining programs. 

II. Programs depending upon authority and compulsion. 

3. The voting programs. 

4. The fighting programs. 

By the balancing-up programs are meant all programs which 
aim to create or restore a balance among occupations so as to 
give those in one occupation the ability to bargain to their 
advantage as effectively as those in any other. Such a pro- 
gram would aim to enable the unskilled worker, as an inde- 
pendent bargainer, to prosper as well as the skilled worker, 
the technician, the business manager, or the capitalist. It 
would aim to equalize the prosperity of different classes by 
first equalizing bargaining power, so that each occupational 
class could, by the simple process of voluntary agreement 
among free and equal citizens, gain as many advantages as any 
other occupational class. This would combine equality with 

1 The substance of this chapter is found in an article by the author, entitled 
"Four Labor Programs," in the Quarterly Journal of Economics for February, 
1919, Vol. XXXIII, No. 2. 

679 



68o PRINCIPLES OF NATIONAL ECONOMY 

individual liberty and initiative. It would leave the individual 
free to make his own arrangements with other individuals or 
groups of individuals, everyone acting voluntarily and without 
any compulsion whatsoever. Compulsion would be exercised 
only to compel the fulfillment of agreements voluntarily en- 
tered into, — never to compel individuals to enter into business 
arrangements against their will. 

By the collective-bargaining program is meant one under 
which individuals voluntarily join associations and surrender 
to the association the power to make business arrangements 
and agreements for themselves. So long as no force or threats 
of force are used to compel the individual to join such an 
association or to prevent his withdrawing from it, such a 
program is voluntary and not compulsory. Voluntary agree- 
ments among free citizens remain the basis of organization, 
rather than the authority and compulsion of the state or any 
other organization. This is the type of business organization 
which has prevailed in free countries under liberal governments. 

By the voting programs are meant all those where the wage- 
workers are to use their voting strength to get control of the 
government and then use the compulsory power of the gov- 
ernment to secure for themselves what they want. Much of 
our social legislation and all programs of state socialism fall in 
this class. 

By the fighting programs are meant all those under which 
the wageworkers are to use their fighting strength to get what 
they want, without waiting for the slow process of gaining 
control of the government by the constitutional methods of 
voting. These fighting programs are sometimes called by the 
more euphonious name of 'direct action." Sabotage, strikes 
accompanied by violence or threats of violence, syndicalism of 
the more extreme sort, and Bolshevism fall in this class. 

Conditions that determine which program shall be followed. 
It is important that we understand the relation of each of 
these programs to the others and to the general economic back- 
ground. It is the belief of the writer that each is the logical 



LABOR PROGRAMS 68 1 

and inevitable outcome of general economic conditions ; that 
one who understands these conditions in any time and place 
can predict, with some approach to certainty, which of the four 
will be the dominant program ; and that the determining factor 
in each case will be the balance or lack of balance among the 
various factors of production, human and nonhuman. 

The idea is too prevalent that bad economic conditions are 
always and necessarily the fault of some person or some insti- 
tution and that the remedy is therefore the punishment of the 
guilty person or the reform of the defective institution. The 
fact is, as shown in Chapter XXXIII, that many bad economic 
conditions grow out of lack of balance among the various 
factors which have to be combined to get any large economic 
result. An unbalanced ration means poor nutrition ; an unbal- 
anced soil means poor crops ; an unbalanced business organi- 
zation — say a farm where there is too much land or not enough 
labor or equipment to cultivate it — means inefficient produc- 
tion; and, finally, an unbalanced nation, which has too much 
labor and too little capital, too much population and not enough 
land, too much of one kind of labor and not enough of another 
to work effectively with it, or any other of an infinite number 
of possible bad combinations, means ineffective production and 
is likely to mean a bad distribution of products. 

Physical basis of value. The laws of value, instead of de- 
pending, as some would have us believe, upon a whimsical 
psychology or an accidental institutional background, are fre- 
quently adaptations to the physical facts connected with this 
problem of balance. If a man is consuming a ration with too 
much starch and too little protein his craving for foods rich in 
protein will increase and his taste for foods rich in starch will 
decrease regardless of the prevailing school of psychology or 
the institutional background. This increase in the craving for 
protein and decrease in the craving for starch will have some 
bearing not only upon his relative valuation of different foods 
but also upon the relative prices which he will be willing to 
pay for them. If the relative market supply of food of the two 



682 PRINCIPLES OF NATIONAL ECONOMY 

kinds is such as to make everybody crave foods rich in protein 
and not those rich in starch, that fact is hkely to influence 
the relative market prices of the two kinds of food. The price 
is an adaptation to the physiological situation and not to the 
institutional background. Even under communism, where no 
open market was allowed to exist, if the one kind of food be- 
came scarcer than the other it would be pretty difficult to 
prevent people from giving expression to their craving for 
protein by trying hard to get more of it, either by surreptitious 
bartering or by stealing. 

A question of balance. The farmer whose soil is unbalanced, 
say with too much nitrogen and too little potash, and who 
observes that the use of a fertilizer rich in potash adds con- 
siderably to his crop is pretty certain to feel a stronger desire 
for potash than for nitrogen. Granting that he wants a large 
crop, the preference for potash as against nitrogen does not 
depend upon the prevailing psychology nor upon the institu- 
tional background. The fact that a larger crop follows the 
addition of a certain quantity of potash to that already in 
the soil, whereas the addition of an equal quantity of nitrogen 
to that already there is not followed by a noticeable increase 
of the crop, is a physical and not a social or a psychological 
fact. Even a communistic society, if it perceived that its soil 
was thus unbalanced and if it knew that it needed additional 
potash more than it needed additional nitrogen, would doubtless 
make greater effort to get potash than to get nitrogen, though 
it might not be wise enough to adopt the simple expedient of 
allowing people to offer a higher price for the one than for 
the other. 

This principle applies to the ratio of population to land, or to 
equipment, or to the ratio of different kinds of labor to one 
another, as well as to the different food elements in a ration or 
the different elements of plant growth in the soil. A community 
— whether communistic, individualistic, or otherwise — in which 
there was an abundance of land and labor but little equipment 
would feel the need of additional equipment more than of 



LABOR PROGRAMS 683 

additional land or labor. This feeling would be based upon the 
observation of a physical fact ; namely, that with its limited 
equipment a few additional acres brought under cultivation 
would add little or nothing to the total product because there 
was not equipment enough to cultivate properly the land 
already in cultivation. Similarly, the addition of a few la- 
borers would add very little to the crop because of the lack of 
sufficient tools for those already at work. But the addition of 
a few tools and implements of the proper sort would enable 
the laborers to work to better advantage and to cultivate the 
land more satisfactorily, and would therefore result in a larger 
crop. If, on the other hand, there were an excess of good tools 
and a scarcity of either labor or land, the community would not 
desire additional tools so intensely as it would desire additional 
labor or land. The reason in this as in the other case would be 
physical rather than social, institutional, or psychological. It 
would be based upon the observation that a large increase of 
product follows every addition to its labor or land, whereas no 
such increase follows an addition to its stock of tools. This 
would be as true in a communistic as in an individualistic so- 
ciety. It would require rather severe repression to prevent men 
from giving expression to their desires by offering a high price 
on the one hand and a low price on the other. If men were per- 
mitted to barter, or to buy and sell, to any extent (that is, 
unless these operations were positively repressed), prices would 
adjust themselves to this fact without the shadow of a doubt. 
As suggested above, this principle applies also to the ratios 
among the different kinds of labor and among the different 
kinds of equipment. In a community where there were more 
horses than were needed to pull all the plows, harrows, and 
other implements that were to be had, it would add very little 
to the crops to add a few horses to the existing stock, but it 
would add considerably to the crop if a few plows, harrows, 
and other implements could be added. Opposite results would 
follow, of course, if it should happen that there v/ere more 
plows, harrows, and other implements than the existing stock 



684 PRINCIPLES OF NATIONAL ECONOMY 

of horses could pull. Again, if in a cotton-mill town there 
were more spinners than were needed to supply yarn to the 
weavers, it would not add much to the total output if a few 
more spinners should appear on the scene ; whereas, if a few 
more weavers were to appear it would make a great deal of 
difference. Under such circumstances it would be more advan- 
tageous to the community, assuming that it wanted cotton 
cloth, to add to its corps of weavers than to add to its corps of 
spinners. One way to get more would be to offer a higher 
wage. This is not the only way : weavers could, for example, 
be conscripted as soldiers are. Liberal communities have gen- 
erally preferred the less drastic method of offering a higher 
wage for the kind of labor which is scarcer in proportion to 
the need for it. This would result in an uneven distribution 
of the product of the cotton industry. 

It is true, of course, that this lack of balance between the 
number of spinners and the number of weavers could not last 
very long. Between those two occupations there is no great 
gulf fixed. The balance would soon be restored, if it were ever 
destroyed, by the habit of seeking the more attractive occupa- 
tion. But there is a much wider gulf fixed between other 
occupations — for example, between such occupations as those 
of unskilled laborers and employers, between bookkeepers and 
general managers, etc. In such cases it is not easy to preserve 
a perfect balance, and consequently an industry may remain 
for a long time in an unbalanced condition as respects such 
occupations as these. 

It goes without saying that the necessity for a balance among 
the various factors of nutrition and production is a physical or 
a physiological necessity. It goes deeper than fashion; it is 
more fundamental than any human institution. Many of the 
laws of the market are based upon this necessity, and the 
market itself as an institution represents an organized attempt 
to adjust ourselves to it. Many other human institutions, in- 
stead of being a background for the laws of value, are merely 
outgrowths of these laws. 



LABOR PROGRAMS 685 

Cases where customs and institutions count. There are, to 
be sure, other cases where convention, custom, fashion, or whim 
is a determining factor in value. In all such cases it may with 
justice be said that a knowledge of the institutional background 
is necessary to an understanding of the phenomena of value. 
For example, the Mohammedan's abhorrence of pork is wholly 
an institutional affair. But whether one were Mohammedan, 
Jew, or Christian would not make the slightest difference in the 
results of a feeding experiment. If a pig were given too much 
starch and too little protein, and it were found that adding pro- 
tein would add considerably to his growth, whereas adding 
starch would not, we should be dealing with a physical fact. In 
short, our institutional background affects mainly our valuation 
of pork rather than the relative valuation of different factors in 
pork production. In general, institutions may be said to affect 
our valuations of consumers' goods rather than of productive 
agents. The relative values of productive agents are determined 
almost exclusively by the physical and objective facts relating 
to their balance or lack of balance in the physical process 
of production. 

So far as the labor market is concerned, customs, traditions, 
and institutions have their principal effect, first, on the incomes 
of those classes which Mill and other economists denominated 
as unproductive laborers — that is, of those who render direct 
personal service and do not aid in producing vendible com- 
modities ; second, on the incomes of those who, without coop- 
eration, produce a complete consumable commodity. The first 
includes barbers, valets, servants, physicians, lawyers, teachers, 
preachers, and a multitude of others. Whether barbers flourish 
or not will depend, of course, somewhat upon styles. Whether 
physicians of various schools earn good incomes or not will 
depend upon a multitude of circumstances, including the habits 
of the people, the repute in which the various schools are held, 
etc. Similar observations could be made regarding all other 
classes who render direct personal service. Institutions affect 
the value of their services very much as they do the value of 



686 PRINCIPLES OF NATIONAL ECONOMY 

consumers' goods. But granting that a consumers' good is 
sufficiently desired to give it a price on the market, then the 
relative value of the factors which enter into its production 
is mainly a question of physical fact which can be ascer- 
tained by physical experiment. If a teetotaler who abhorred 
whisky could bring himself to manufacture whisky for the 
market, if a Quaker who abhorred jewelry could bring him- 
self to manufacture jewelry, or if a Mohammedan who ab- 
horred pork could bring himself to produce pork, he would 
reach the same conclusions, in any given time and place, as to 
the relative value of the different factors of production as would 
be reached by any other producer of equal intelligence. 

The second group — that consisting of individuals who, un- 
aided and without cooperation, produce consumable commod- 
ities in complete form — is almost negligible. The fisherman 
who sells his individual catch may be cited as an example. 

Labor problems grow out of division of labor. The labor 
problems which are acute at the present time relate to the com- 
pensation of labor which works in combination with many other 
factors in production. Those laborers who render direct per- 
sonal service, and those who produce by individual effort alone, 
sometimes have their grievances. These grievances occasion- 
ally give rise to what may be called a special social problem, 
but such problems differ materially from those labor problems 
in which the public is now chiefly interested. These prob- 
lems are all more or less directly concerned with the question of 
sharing the products of those industries which combine many 
factors, including not simply labor, land, and capital but many 
kinds of labor and many kinds of capital. This is precisely the 
kind of problem with which psychology, custom, tradition, 
government, religion, and other institutions have very little to 
do directly, though they may exert a great deal of indirect 
influence. This problem resembles that of the relative impor- 
tance to plant growth, in a given situation, of various elements 
in soil fertility ; of the relative importance to animal growth, 
in a given ration, of the various elements of animal nutrition : 



LABOR PROGRAMS 687 

of the relative importance to farm production, in a given com- 
bination of productive factors, of different items in the equip- 
ment. It is a question of physical fact which could, in any 
case, be determined by physical experimentation if anyone were 
willing to go to the expense of running the experiment station. 

A question of more or less. This is always a question of hav- 
ing more or less of a given element, and not of having some or 
none of it, in a given combination. In a given soil it is a ques- 
tion of the importance of having more or less nitrogen, not a 
question of having some nitrogen or none at all, which interests 
the real farmer. The '^flower-in-the-crannied-wall" philosopher 
would doubtless say that, ^'absolutely speaking," or in terms of 
the '^ higher logic," nitrogen is no more important to plant 
growth than silica or a number of other soil ingredients. The 
scientific farmer knows that his soil generally contains all the 
silica his crops can possibly use, and some more besides, and that 
therefore it would not be good economy to buy any more. He 
also knows that in most soils there is less available nitrogen 
than his crops can use and that a little more nitrogen would be 
followed by a little more crop. When he is certain of that, the 
kind of logic which he needs in his business will lead him to buy 
nitrogen provided its price is not above that of the expected 
increase in his crop. 

A fertilizer company has recently been in actual operation 
in New England, trying to sell a fertilizer containing none of 
the elements of plant food which farmers ordinarily buy, but 
very rich in silica ; that is, sand ! This company published 
statements of scientific men to the effect that plants require 
silica for their best growth. It could probably have been demon- 
strated that a soil absolutely devoid of silica would not grow 
crops at all. Therefore, some would argue, silica is the great 
producer of crops. This argument might be sufficient to satisfy 
the demands of the ''higher logic," but it was not sufficient to 
satisfy the demands of scientific farmers, nor did it prove to 
be sufficient to satisfy the court nor to keep the promoters of 
this company out of jail. 



688 PRINCIPLES OF NATIONAL ECONOMY 

It was suggested above that while institutions could have 
very little direct influence upon a problem of this kind, they 
could have considerable indirect influence. In a community 
where soils need more nitrogen to secure better crops but do 
not need more silica, institutions could scarcely succeed directly 
in giving nitrogen and silica equal values. They might succeed 
indirectly if they could set forces to work which would make 
soil nitrogen as abundant as silica, or silica as scarce as soil 
nitrogen. In a community where foods rich in protein were 
physically scarce relatively to needs, whereas foods rich in 
starch were physically abundant, institutions could scarcely 
succeed directly in giving equal values to various kinds of food. 
If the government or any other institution could set forces to 
work which would make different kinds of food equally abun- 
dant or equally scarce, the equality of values would take care of 
itself. Such a program could properly be called a balancing-up 
program. 

The balancing-up program. This balancing-up program may 
be vastly extended. Governments, schools, and other institu- 
tions may easily set forces to work which will accelerate the 
accumulation of capital and eventually make it so abundant 
relatively to land and labor as to give capital a smaller and 
labor or land a larger share in distribution. That is what a 
thrift campaign is for. Forces may also be set to work which 
will spread population over wider areas, reduce the intensity of 
the demand for favored locations, and reduce rent, leaving 
larger shares to the other factors. It would be very easy to set 
forces to work which would reduce the number of unskilled 
laborers and increase the supply of employing talent. This 
would automatically result in some approach to equality, — at 
least it would result in higher wages for unskilled labor and 
lower incomes for the employing classes. If carried far enough 
a balancing-up program would give us something approximating 
to equality of income without sacrificing individual freedom. 

Equality with liberty. A social system in which each free in- 
dividual made his own business adjustments on the basis of 



LABOR PROGRAMS 689 

voluntary agreement with other free individuals and where, in 
addition to this universal freedom, there was universal and 
approximately equal prosperity would certainly be more desir- 
able than a system which secured liberty without equal pros- 
perity or equal prosperity without liberty. The balancing-up 
program is the only program which can possibly give us both. 
All other programs sacrifice one or the other. 

Thrift. In order to make capital so abundant as to reduce 
the share of the capitalist class and increase the share of the 
laboring class we need, first and foremost, a general, aggressive, 
and permanent thrift campaign. The twin virtues of thrift 
and industry have been very unequally cultivated in almost 
every community. While thrift is quite as important as industry 
to national prosperity, it has by no means received the encour- 
agement that industry has received. Training for industry has 
been provided at public and private expense, and every kind 
of social and moral pressure has been brought to bear upon the 
young to be industrious. No one has commended the idle man, 
but many have commended thriftlessness and extravagance. 
Advertisers and salesmen have never exercised their arts and 
blandishments to induce men to be idle, but they have done 
much to induce men to be thriftless and extravagant. Only a 
few agencies have been working effectively to induce men to 
save and invest their incomes. One very important step would 
be taken toward balancing things up if as many encouragements 
and temptations and as much social and moral pressure could 
be brought to bear upon men to induce them to save as are now 
brought to bear to induce them to work. 

It is almost as great a help to industries when citizens invest 
largely in industrial bonds as it is in war when citizens invest 
largely in government bonds. In the one case an abundance of 
capital is secured for the equipment of industries ; in the other 
case an abundance is secured for the equipment of war enter- 
prises and paying the war expenses. Those communities and 
nations in which large numbers are investing in industrial enter- 
prises are the communities or nations whose industries will 



690 PRINCIPLES OF NATIONAL ECONOMY 

grow and expand and in which there will be ample employment 
for labor of all kinds. Let us suppose that two communities 
have equal incomes and are able to spend equal amounts of 
money this year in purchasing goods or hiring labor to make 
goods. Let us suppose that Community A spends all its clear 
income this year on consumers' goods, spending only enough 
on producers' goods to keep its supply of capital intact, whereas 
Community B spends half its clear income this year on pro- 
ducers' goods and only half on consumers' goods. There will 
be as many goods purchased this year and as much labor em- 
ployed in Community B as in Community A. The difference 
will be that half the available labor power in Community B 
will be employed in making producers' goods, whereas all the 
available labor power in Community A will be employed in 
making consumers' goods. 

Next year, however, Community B will be better equipped 
with producers' goods than Community A. Its total product 
(that is, its real income) will be larger than Community A's. 
It will have more to spend and will be able to employ more 
labor or employ it to better advantage. If it continues spending 
half its enlarged income in producers' goods, adding largely 
to its productive equipment from year to year, it will out- 
strip Community A and leave it farther and farther behind. 
In a short time laborers from Community A will be migrat- 
ing to Community B, where there are more employment and 
better wages. 

The different items in a balancing-up program need not be 
discussed in detail. They will be considered in detail in 
Chapter LVI. 

The collective-bargaining program. The indispensable man 
can generally get what he wants by the method of voluntary 
agreement. The superfluous man will have difficulty. To the 
man who, in any industrial situation, is indispensable, freedom 
means freedom to prosper. To the superfluous man freedom 
may mean freedom to starve and is pretty certain to mean 
freedom to be relatively unprosperous. 



LABOR PROGRAMS 691 

Any industrial condition in which one man is indispensable 
and another superfluous is necessarily an unbalanced condition. 
No man is indispensable if there are plenty of others who can 
do the same kind of work that he does. No man is superfluous 
unless there are more than are needed to do the kind of work 
which he can do. A situation in which no class of men was so 
small as to make any one indispensable and no class so large as 
to make any one superfluous would be a better-balanced situa- 
tion. One in which more men were about equally needed in 
every occupation would be perfectly balanced. 

It has already been pointed out that even in an unbalanced 
situation, while the individual in a large class may be super- 
fluous, the class as a whole is indispensable. There may, for 
example, be so many ditch-diggers as to make any individual 
among them superfluous ; nevertheless, ditch-diggers as a class 
may be indispensable. The superfluous individual, bargaining 
alone, is weak and can never, so long as he is superfluous, bar- 
gain to his own advantage. The indispensable class, if it can 
bargain as a unit, can take advantage of its indispensability and 
bargain to its own advantage. Therein lies the philosophy of 
the collective-bargaining program. 

Its reason for existence is found, however, in an unbalanced 
industrial system. A kind of labor which is scarce enough to 
make each individual laborer practically indispensable would 
not need collective bargaining. Individual bargaining would 
give him his full share in the general prosperity. To use 
collective bargaining to add still more to that prosperity would 
not be a means of defense but a means of extortion. It would 
not differ in any essential particular from the trust, and the 
public would soon become as impatient of collective bargaining 
on its part as it has already become of collective bargaining 
on the part of the trust. 

Where the lack of balance among the factors of production 
is not so very extreme (that is, where there is no great over- 
abundance of one factor and no great scarcity of another), 
collective bargaining on the part of those who sell the overabun- 



692 PRINCIPLES OF NATIONAL ECONOMY 

(knt factor is a sufficient remedy. That happens to be the situ- 
ation in the United States with respect to most forms of skilled 
manual labor. Skilled laborers are not so numerous as to 
place them at any great disadvantage in the bargaining process. 
Such disadvantage as they suffer can generally be overcome by 
the simple process of collective bargaining. They are not 
strongly tempted to adopt either the voting or the fighting pro- 
gram : first^ because they have no such grievance as would jus- 
tify their surrender of individual freedom; second, because 
they are not numerous enough to give them much voting or 
fighting power. 

The voting program. Generally speaking, the more numer- 
ous any industrial class happens to be, the weaker its members 
are in the process of bargaining on the free and open market. 
But the numbers which make them weak in bargaining make 
them strong in voting. On the market they are at a disadvan- 
tage ; in politics they are at an advantage. The greater their 
weakness on the market, the greater their voting strength 
in politics. 

As stated above, where the disproportion of numbers is not 
so very great, the disadvantage in bargaining is likewise not so 
very great, neither is their voting strength so very great. Under 
such circumstances the voting program does not seem to be 
necessary nor does it promise much success. Collective bargain- 
ing is the only logical program. But where the disproportion is 
very great the voting program seems to be more of a necessity 
and, what is more to the point, promises greater success. 

In a community where any class of wageworkers, say un- 
skilled laborers, outnumbers all other people the oversupply of 
unskilled workers will make their position on the labor market 
very difficult. Even collective bargaining has its limits, mainly 
because of the difficulty of keeping so large a mass together in 
order to bargain as a unit. But since they outnumber all others 
their voting strength is overwhelming if they can be induced to 
vote as a unit. They could easily control the state, elect the 
entire personnel of government, and use the compulsory power 



LABOR PROGRAMS 693 

of the government to gain their own ends. As a matter of fact 
they would not even have to take the initiative. Candidates 
for the salaries and emoluments of public office would certainly 
appreciate their opportunities. They would seek the votes of 
this class which had so many votes to give, by offering it every- 
thing it wanted, even more than it had the courage to ask for. 
The voting program is therefore almost a certainty in any 
community where the disproportion of occupational classes 
is very great. 

This will explain why the dominant elements in American 
trade-unionism have always stood for a collective-bargaining 
rather than for a voting program. They have not needed to 
control the state in order to gain fairly good wages for them- 
selves, and, moreover, they have not had votes enough to control 
the state even if they had wanted to. It will also explain why 
English laborers have adopted a voting program. The dispro- 
portion between wageworkers and other factors of production, 
or other elements in the population, is much greater there than 
here. In bargaining, English laborers are as a class therefore 
weaker and in voting stronger than American laborers. Eng- 
lish laborers therefore have greater need of the help of the 
state and greater power to gain control of the state than have 
American laborers. The sheer logic of this situation calls for 
a greater trend toward socialism there than here. 

Other classes besides laborers have shown the same tendency 
to use the state to help them out of a situation in which their 
bargaining power was reduced. In the seventies and eighties 
of the last century there was a disproportionate production of 
agricultural crops in this country. The rapid settlement of the 
rich prairies of the West had poured a flood of agricultural 
products upon the markets of the world. This put the farmers 
at a disadvantage on the free and open market. Their numbers 
proved to be their weakness on the market but their strength at 
the polls. They were not slow to realize the situation and to 
use their voting strength rather than their bargaining weakness. 
Even if they had been slow to realize it, they were abundantly 



694 PRINCIPLES OF NATIONAL ECONOMY 

reminded by a swarm of candidates for office who had uses for 
the large farmer vote. Since the beginning of the present cen- 
tury the farmers have not been so numerous relatively to the 
rest of the population as to be placed at a great advantage 
at the polls. In fact, the rural population is now less than the 
urban. Consequently the wiser farmers are not now demand- 
ing so much help from the government. At the same time 
the candidates for high public office have, except in the far 
Northwest, almost forsaken the farmer and have become very 
solicitous of the labor vote. 

There was also a time when the manufacturers — especi- 
ally those starting new lines of manufacturing — felt weak on 
the market, or thought that they did when brought into com- 
petition with old and well-established rivals across the water. 
They then turned to the state for help. They were able to 
deliver considerable numbers of votes. The result was that 
candidates for office became solicitous as to the welfare of 
infant industries. 

In England after the Black Death, when labor was scarce 
and hard to find, laborers were strong in bargaining, but weak 
in voting because they had no votes. The employing classes 
were temporarily weak in bargaining but strong in voting, since 
they did whatever voting was done. At any rate they controlled 
the government. They were not slow to use the government to 
help themselves in the bargaining process by passing stringent 
laws for the regulation of wages. 

In view of all these experiences it is pretty certain that any 
class which finds itself so numerous as to be weak in bargaining 
and strong in voting will make use of a voting program. It is 
not so certain, judging by past and present experience, that it 
will use its voting power wisely. In fact, no case has yet 
appeared where a voting program adopted under such condi- 
tions was not destructive rather than constructive ; which was 
not demagogic rather than economic ; which did not consist in 
killing the goose that laid the golden eggs, in order to seize the 
whole stock, rather than in increasing the flock. But that is 



LABOR PROGRAMS 695 

not the important certainty. The important certainty is that 
wherever and whenever such an unbalanced condition is al- 
lowed to arise as that which exists in England today, a voting 
program similar to that which has been paraded in this country 
as the program of the British Labor Party is certain to be 
adopted. Though it lacks a single constructive feature, though 
it is made up exclusively of scraps of Marxian jargon, catch 
phrases, and shibboleths, nevertheless it is the kind of pro- 
gram which any class is likely to adopt in its own interest when 
it for the first time concludes that it can outvote other classes 
and control the state. 

The fighting program. It is sometimes affirmed that the labor 
program in England is more "advanced" than that of the 
American laborers. By the same token the program of the 
Russian laborers is more "advanced" than that of the British. 
The disproportion of the wageworkers to other urban classes 
is also greater in Russia than in England, as it is in England 
than in the United States. That is to say, there are fewer tech- 
nicians, business men, capitalists, and also smaller accumula- 
tions of productive capital and fewer productive establishments 
calling for men, in proportion to the number of men available 
to run them, in Russia than in England, and in England than 
in the United States. This disproportion puts the Russian 
laborers, particularly the great mass of ignorant and unskilled 
laborers, at a still greater disadvantage in bargaining, but 
gives them vastly greater strength in other ways. 

Numbers give strength not only in voting but also in fighting. 
Fighting, provided victory is certain and overwhelming, is a 
shorter cut to what is wanted than voting. To be sure it may, 
like other short cuts, not work well in the long run, but it looks 
like a quicker method of getting possession of accumulated 
wealth than the voting program, as the voting program is quicker 
than the program of industry, thrift, and sound investing. 

Where the numerical strength of the wageworkers is not 
overwhelming, fighting may prove expensive even though ulti- 
m.ate success looks pretty certain. Voting looks like a cheaper 



696 PRINCIPLES OF NATIONAL ECONOMY 

program than killing. But where numerical strength is so over- 
whelming as to make victory in fighting not only certain but 
cheap, because of the absence of power of effective resistance on 
the part of other classes, the fighting program is pretty certain 
to be adopted, provided there is no moral restraint or economic 
wisdom to lead people to adopt a more constructive program. 

It is useless to point out to a great mass of ignorant and 
unskilled labor that even though they have the power to take 
possession, with very little fighting, of the accumulated wealth 
of the country, still they would better not do it because, in the 
long run, they will lose more than they will gain by it. If they 
were capable of appreciating such arguments they would not be 
ignorant and unskilled laborers. Men are not ignorant and 
unskilled laborers in industry and at the same time farsighted 
statesmen in politics. They are just as ignorant and short- 
sighted with respect to public as with respect to private affairs. 
There is therefore no safeguard against the fighting program 
except the prevention of the development of a large class of 
ignorant and unskilled laborers. If such a class exists, there 
will be trouble ; if it does not exist, there will not be any danger 
of a fighting labor program. 

Therefore we may conclude that whenever and wherever a 
nation becomes so unbalanced occupationally as Russia, the 
fighting program is certain to be the dominant labor program. 
In short, we in this country can have any one of these four 
programs which we choose to have. If we balance things up 
none of the other programs will become dominant or dangerous. 
If things become slightly unbalanced some kind of collective- 
bargaining program is certain to grow out of the situation. If 
they become somewhat more unbalanced a voting program is 
certain to become the dominant program supported by the nu- 
merically superior class, whose numerical superiority makes it 
weak on the market but strong at the polls. If they become still 
more unbalanced the numerically superior class, finding itself 
hopelessly weak on the market but overwhelmingly strong in the 
use of physical force, will use its strength to take what it wants. 



CHAPTER LI 



Types of 
propaganda 



Kinds of 
Socialism 



I 



Socialistic 
programs 



SOCIALISM 

Religious 
Fulminatious 
' Idealistic ^' Utopian 

Experimental 
[ Opportunist 
r Political 
Marxian V f Syndicalist 

[ Militant -j Bolshevist 

[The I.W.W. 

' Ownership acquired by 

pui chase 
Ownership acquired by 
force 
' Ownership acquired by 
purchase 
Ownership acquired by 
force 



' General state ownership - 



Ownership by groups of 
workers 



An authoritarian program. The most widespread of the va- 
rious authoritarian movements is that which goes under the 
name of sociaHsm. It has never received the support of a major- 
ity of the voters, or even a large minority, in any country ; but 
it has a vigorous organization of propagandists in practically 
every country. The only real victories it has won have been 
those of physical force, where, as in Russia and, for a short time, 
as in Hungary, a violent minority cowed the majority into sub- 
mission. Even the violent minority in Russia, when faced with 
the necessity of producing enough to feed and clothe the people, 
was forced to give up most of its socialism and return, in part 
at least, to private property, especially in land. Because of the 
activity of its advocates and the vigor of its propaganda, 
it is necessary to understand what socialism is and what its 

advocates are driving at. 

C97 



698 PRINCIPLES OF NATIONAL ECONOMY 

"Socialism" and "communism" have shifted meanings. The 
term ''socialism" has a variety of meanings, though there are 
certain elements common to every definition. During the last 
seventy-five years the meanings attached to "socialism" and 
''communism" have been shifted. That which is now known as 
socialism was formerly known as communism. Karl Marx, who 
is regarded as the great apostle of modern socialism, called him- 
self a communist. On the other hand, "socialism" was applied 
to general schemes for social amelioration which did not involve 
any fundamental change in the organization of society. Com- 
munism, however, fell into disrepute, and its followers dis- 
carded the name and began calling themselves socialists. 
Since the World War socialism has, in turn, fallen into dis- 
repute and communism is again the dominant form of 
revolutionary propaganda. 

There is a tendency for partisans of any program or move- 
ment to define their program in the most favorable terms 
possible. This applies to socialists as well as to other propagan- 
dists. Sometimes this tendency leads to a definition of social- 
ism which does not define, but which includes the opponents 
as well as the proponents, of socialism. When it is said, for 
example, that socialism teaches the doctrine that only he who 
produces shall consume, it may be replied, "So also does in- 
dividualism" — and practically every other ism that has any- 
thing to do with the production and distribution of wealth. 
When it is said that socialism teaches the doctrine of equality 
of opportunity it may be replied, "So also does individualism" 
— and all the other isms. 

The difference between a socialist and a nonsocialist. In order 
to define socialism we must find something which will com- 
pletely distinguish the socialist from the nonsocialist. The 
only definition that will do this is the following : A socialist is 
one who believes that the community, the public, or the govern- 
ment should own and operate the means of production, leaving 
to individuals the ownership of most articles of consumption. 
By the means of production are meant practically all thatjs 



SOCIALISM 699 

included under the names ''land" and ''capital," — farms, fac- 
tories, railroads, mercantile houses, and office buildings would 
all be included ; under the program of socialism all these things 
would be owned and operated by the community, the public, or 
the government. This would mean that almost every individual 
would be in the employ of the government in one way or an- 
other. Since there would be no private enterprise, no one could 
start a farm, a factory, a store, or any business enterprise of 
his own. Since no one could start any such enterprise, no one 
could be employed by a private employer. Since no one could 
be either in his own employ or in the employ of any private 
organization, everyone who expected an income would have to 
be in the employ of the government. 

There is some difference of opinion among socialists as to 
how far this principle of government ownership and operation 
should extend. Some profess to be willing to stop with trusts 
and monopolies. This, however, is populism rather than so- 
cialism. It is based not on a theory of capital but on a theory 
of monopoly. Many people w^ho favor the private ownership of 
capital are opposed to monopoly and believe that the best way 
to curb monopoly is to turn all monopolistic enterprises over 
to the state. Such 'a person might utterly reject all socialistic 
theories respecting capital. Moreover, every thoroughgoing 
socialist really bases his conclusions on his theory of capital. 
The work of Karl Marx, on "Capital," has been called the 
Bible of the modern socialist. This book pays very little atten- 
tion to the question of monopoly ; it consists almost entirely of 
an attack upon capital and capitalistic production. From Marx's 
point of view it is not monopolized capital, but capital as such, 
that gives its owner the power to exploit and defraud other peo- 
ple. The capital belonging to a farmer as well as that belqaiging 
to a great trust, to a small manufacturer as well as to a large 
manufacturer, to the driver of a jitney bus as well as to a street- 
car company, is to be owned and operated by the public. 

Socialism is not populism. On the other hand, the slogan 
"Let the nation own the trusts" has nothing to do with capital 



700 PRINCIPLES OF NATIONAL ECONOMY 

as such. Such a program is based entirely on a theory of 
monopoly, which is the essence of populism rather than of 
socialism. Those who hold to this doctrine may quite con- 
sistently hold to the idea that capital which is not monopolized 
is a help rather than a hindrance to labor, that he who accumu- 
lates capital by consuming less than his income is benefiting 
rather than injuring labor, and that therefore everybody ought 
to be encouraged to accumulate capital and invest it in produc- 
tive enterprises. From this point of view the individual who 
has accumulated capital and invested it in a productive enter- 
prise has not only increased the productivity of the community 
but is entitled to some reward for that service which he has 
performed. This reward would be called interest. The populist, 
therefore, would approve of the receipt of interest on the part 
of the owner of unmonopolized capital. 

All the great authoritative books on socialism are funda- 
mentally opposed to interest or to anyone's receiving any in- 
come in the form of interest. If labor is the only producer of 
wealth, the saver and accumulator is not a producer and is 
therefore not entitled to any share in the product. Since in- 
terest is the share which goes to the accumulator and investor, 
it cannot be justified under the socialistic philosophy. 

Difference between a socialist and a liberalist. The defini- 
tion of a socialist as one who believes in the common, public, 
or government ownership of all the means of production sepa- 
rates the socialist not only from the populist and the com- 
munist but from the liberalist as well. Moreover, this is the 
only definition which will at all distinguish the socialist from 
the liberalist. The liberalist is quite as desirous of economic 
justice and of equality of opportunity as the socialist, but 
he believes that the liberalistic program is better adapted to 
the securing of those ends than is the socialistic program. The 
liberalistic program permits the private ownership of capital, 
and it also permits the receipt of interest as a private reward, 
on the ground that the accumulation of capital is a produc- 



SOCIALISM 701 

tive service, — not that it is philanthropic, but that it is useful 
to society. 

In order to becloud the issue it is sometimes stated that the 
socialist believes that men should be paid for doing things and 
the liberalist that men should be paid for owning things. The 
liberalist does not believe that men should be paid for owning 
things unless the ownership is a symptom of their having done 
something which was useful. If two men, A and B, have been 
doing equally good work with their hands and their heads and 
have earned equal incomes they should be paid the same, ac- 
cording to the liberalist as well as the socialist. If, however, A 
consumes all his income, but B invests a part of his in the tools 
of production, the liberalist believes that B has done better 
than A. If everybody did as A does, the nation's stock of tools 
"would never increase ; if everybody did as B does, the nation's 
stock of tools would increase rapidly. The more citizens it 
has of the B type, the more prosperous will the nation become ; 
the more it has of the A type, the less prosperous it will be- 
come. It is very important that men should be encouraged to 
join the ranks of the B's rather than of the A's. The liberalist 
therefore holds that there should be some inducement to men 
to do what B has done ; namely, to invest a part of their income 
rather than to consume it. 

In the smartness of debate one might still say that B is 
hereafter being paid for owning something, whereas A was 
paid only for doing something; but as a matter of fact that 
which B appears to be paid for owning is only a deferred pay- 
ment for that which he did before. When he refrained from 
using up his income in riotous living and devoted it to a useful 
purpose he postponed the day of his enjoyment of his income. 
It is virtually, therefore, deferred payment for his work. The 
money which he received for his work was not final payment ; 
the final reward of every individual is that which he consumes. 
When B decided to defer consumption he was really deferring 
the receipt of his wages. 



702 PRINCIPLES OF NATIONAL ECONOMY 

There is no other definition of ''socialist" or "socialism" 
which will separate the socialist from the nonsocialist or which 
will particularly separate him from the liberalist. The term 
''liberalist" is justified because the liberalist beheves that, as far 
as possible, each individual should be at liberty to start his own 
enterprise if he is so disposed or to work for someone else if he 
prefers; that he should be at liberty to work for private in- 
dividuals or to work for the government, according as he can 
make the most satisfactory voluntary agreements. In short, the 
liberalist is willing to trust men with the power of free con- 
tract, whereas the socialist relies mainly on the government's 
power of compulsion. 

Socialism involves more use of the government's power of 
compulsion than does liberalism. It has been said that the 
power to tax is the only capital the government needs. But the 
power to tax is compulsion. In order to carry out a socialist 
program the public would have to use its power of compulsion 
in many ways. It would have to prohibit competition by pri- 
vate individuals against the state as it now forbids private 
individuals to compete with the post office in the carrying of 
first-class mail. It would have to use its taxing power to com- 
pel the payment of deficits whenever deficits occurred. The 
liberalist, on the other hand, proposes to reduce to a minimum 
the compulsion of the government over the individual. An in- 
dustry which cannot be carried on without any compulsion 
whatsoever had probably better be left to die, unless it be 
one which is necessary for military protection. If an individual 
who desires to manufacture shoes cannot manufacture them 
successfully without the power of compulsion, he should not 
manufacture them at all. If he can buy his raw materials on 
the open market and hire his labor on the open market and 
sell his product on the open market, making use everywhere of 
voluntary exchange and voluntary agreement, and can manage 
to make a profit out of his business he is entitled to remain in 
business. It shows that he is efficient enough to assemble the 
various factors of production in such a way as to produce an 



SOCIALISM 703 

article which is worth more than the cost of those factors of 
production. This is highly economical. If in order to make a 
living he had to be paid out of the public treasury, and the 
public had to make use of its power of taxation in order to get 
the wherewithal to pay his salary, there is a strong probability 
that the product would not be worth as much as the factors 
which entered into it. In that case the power to tax would 
have to be made use of to keep the business going, but the fact 
that compulsion was necessary would be proof that it ought 
not to be used, but that the business should die a natural death. 

Where there is no free bargain and sale, — where consumers 
are not at liberty to turn from one producer to another and 
buy whatever suits them best, where the producers of raw 
material are not at liberty to sell to any manufacturer who 
will pay them the highest price, and where labor is likewise not 
free to bargain to its own advantage, — there is no assurance 
that the maximum economy will be secured. 

Compulsion sometimes necessary. It is not to be inferred, 
however, that the liberalist is an anarchist and therefore op- 
posed to all exercise of compulsion or governmental power. 
He is one who believes that a great many lines of production 
can be safely and successfully carried on without the use of 
compulsion, under voluntary agreements, free contract and 
sale, and individual initiative. He also quite frankly recognizes 
that there are many things which cannot be done in this way. 
For example, the forestation of certain mountain slopes would 
be undertaken by private enterprise only when the enterprisers 
thought that it would be profitable to them. But although it 
might be unprofitable when considered by itself, it might still 
be highly profitable when considered from the viewpoint of 
the nation as a whole. If the deforestation of high mountain 
slopes results in the overflow of streams and the destruction of 
valuable land along the lower watercourses, this is a matter 
which affects the country as a whole but might not interest the 
individual owners of the high slopes. If they found it profit- 
able to cut off the timber and sell it they would do so even 



704 PRINCIPLES OF NATIONAL ECONOMY 

though property of much greater value a few hundred miles 
away on the river bottoms were destroyed. Here would be 
a clear case where government enterprise would be superior to 
private enterprise. But similar reasoning would in some cases 
prove the superiority of international enterprise over govern- 
ment enterprise. It might very well happen that the high 
mountain slopes were within the territory of one nation, and 
the river bottoms in the territory of another. In that case 
the nation owning the high mountain slopes would have no 
interest in protecting the river bottoms. Nothing but an 
international arrangement could solve that problem. 

Again, take such an enterprise as the building of lighthouses. 
The private individual who built a lighthouse on a rocky coast 
would scarcely be able to collect toll or to get payment for the 
utility which he was furnishing. Not having the power of 
compulsion he could not force mariners to pay nor could he tax 
the public at large in order to build and maintain lighthouses. 
The public alone has this power of compulsory collection. In 
any other case (and there are many of them) where it can be 
shown that freedom of contract will not succeed in getting an 
important work done or an important utility produced, the 
liberalist is willing to see compulsion used. 

"Socialism," like "vegetarianism," is an exclusive term. *^ Lib- 
eralism" is therefore not an exclusive term, as "socialism" 
seems to be. In this respect ^^ socialism" is like "vegetarian- 
ism" and certain other exclusive terms. One is not a vegetarian 
by virtue of the fact that one sometimes eats vegetable food ; 
one is a vegetarian only when one refuses to eat anything else. 
A liberalist with respect to food is willing to eat any kind which 
seems to him to be desirable, and to permit others to do the 
same. In a similar sense one is not a socialist by virtue of the 
fact that one is willing that the government should do some 
things ; one is a socialist only when one believes that private 
individuals should not carry on any productive industry or own 
any productive capital. The liberalist is willing that industry 
shall be carried on in any way that seems to promise desirable 



SOCIALISM 705 

results. If an individual farmer can grow corn successfully 
the liberalist is willing that he shall do so and make a profit 
out of it ; if the individual manufacturer can manufacture suc- 
cessfully the liberalist is willing that he shall do so and likewise 
make a profit ; and so on. He perhaps goes a step farther and 
believes that preference should be given to free and voluntary 
business arrangements rather than to compulsion, and that com- 
pulsion should be used only when the voluntary system fails to 
get desirable things done. 

Criticism always easy. As to the merits of the socialistic 
program as compared with other programs, there will always be 
considerable differences of opinion. It is not difficult to point 
out with a great deal of particularity the evils that result from 
a liberalistic policy. The unfortunate condition of those people 
who are not in a position to bargain to their own advantage is 
perhaps the strongest argument used by the present-day social- 
ists. It is very easy to find many communities in which certain 
classes of laboring men find it impossible to get good wages by 
the method of voluntary agreement, whereas other people who 
use this method get larger incomes than are necessary or desir- 
able. This observation, however, is not confined to labor. Any- 
one who is trying to sell something with which the market is 
oversupplied is in a more or less helpless position. When more 
is offered for sale than buyers care to buy, the seller is very 
dependent, whereas the buyer is independent. Under the sys- 
tem of voluntary agreement the seller must take what he can 
persuade the buyer to pay, and the buyer can take his choice. 
If, however, you reverse the conditions you find buyers who 
want to buy more than sellers are willing to sell. Then buyers 
are very dependent ; they must take whatever they can per- 
suade the sellers to sell, whereas sellers are independent and 
can take their choice. 

It happens that certain kinds of labor seem to be almost 
chronically in this position of dependence. They always, and 
rightly, evoke sympathy. There are two ways, however, of 
correcting the difficulty. One is to substitute the system of 



7o6 PRINCIPLES OF NATIONAL ECONOMY 

compulsion for the system of voluntary agreement; the other 
is to make that kind of labor scarce and hard to find. Seeing 
that these unskilled laborers are now beaten under the system 
of voluntary agreement, it looks rather obvious to some people 
that something else must be substituted. But the liberalists 
maintain that labor is not necessarily, and not always, at a dis- 
advantage under the system of voluntary agreement. If we 
can redistribute the labor supply so that there will not be too 
much of one kind in proportion to the other factors, then the 
laborers will be in a position of great independence. It is not 
difficult to point out instances where the laborer is independent 
and the capitalist dependent, — where the preservation of the 
capitalist's property — where even his income itself — depends 
on getting labor when there is not enough labor to go around. 
In such cases the capitalist must take whatever labor is of- 
fered, whereas the laborer can take his choice of employers. 
There need not be the slightest difficulty in creating such condi- 
tions for labor in general, but it will require the following of 
a program radically different from that of the socialist. It 
looks much easier merely to exercise the compulsory power of 
the state and cure the difficulty at one stroke. Not many dif- 
ficulties, however, are permanently cured at one stroke or by 
the exercise of compulsion. 

Why there are socialists. When the victim of a wasting sick- 
ness goes to a physician for help he is very likely to be disap- 
pointed. The physician, if he is scientific and honest, can 
seldom promise him a definite cure. Being a scientific man 
he can point out the causes which produce the illness and say 
that if at some time in the past the patient had pursued differ- 
ent habits he would not have become ill. This, however, is 
cold comfort to the sick man, who is suffering intense pain. 
Or the physician may prescribe a course of treatment which, 
if rigidly followed for a period of time, will tend to remove the 
causes of the illness and eventually improve the patient's con- 
dition. This likewise is cold comfort to the man in pain, who 
wants immediate relief. Such a man is in a good frame of mind 



SOCIALISM 707 

to lend a favorable ear to the '"doctor" with a specific remedy 
who promises him a specific cure. This is why a certain type 
of unscientific practitioner, commonly called a quack, flourishes. 

Similarly, the man who is in the grip of poverty, as well as 
his sympathizers, is likely to be disappointed with the program 
of the economist. The economist, if he is a scientific man 
and honest, will be compelled to say that there is no immediate 
relief which is not likely to produce worse results in the 
future. Being a scientific man he can point out the condi- 
tions which tend to induce poverty and can prescribe policies 
which, if they had been pursued consistently for a number of 
years, would have prevented the poverty which now exists. 
This is cold comfort to the man who is already suffering from 
poverty and longing for relief. Such a man is in a condition 
to lend a favorable ear to the doctor with a specific remedy. 
The obvious and specific remedy which is commonly used is 
the compulsory power of the state or of the mass over the 
individual. This is sometimes called democratic, but there is 
nothing particularly democratic in compulsion. One of the 
most democratic things in the world is freedom of contract, — 
freedom on the part of the individual to pursue his own interests 
so long as they happen to coincide with those of the public. 

There is a close parallelism between the condition of the 
laborer on the oversupplied labor market and the condition of 
the producer of vendible commodities on an oversupplied com- 
modity market. In the early nineties of the last century farm 
products were greatly oversupplied. There had been a rapid 
settlement of the fertile prairies of the West and a rapid in- 
crease in the tillable area on all the farms. The result was 
that a great flood of agricultural products was poured upon the 
markets of the world, depressing prices not only in this country 
but in Europe as well. In that situation the farmers were in a 
dependent condition. They had much to sell and there were 
apparently few buyers, — few at least relatively to the amount 
of produce that was offered. The average farmer had to take 
what he could get. Naturally enough this situation created dis- 



7o8 PRINCIPLES OF NATIONAL ECONOMY 

satisfaction, and demands were made by the agricultural classes 
of the South and West for some kind of compulsory action 
by the government. On the basis of free contract they were 
at a great disadvantage and not unnaturally desired to use 
some other method, for the time being at least. Freedom, to 
them, frequently meant freedom to become bankrupt and to 
go hungry. 

During the first two decades of the present century the con- 
ditions were reversed, and the boot was on the other foot. 
The world was experiencing a great shortage of agricultural 
products. Buyers were everywhere asking for products, and 
there appeared to be few sellers, — few at least relatively to the 
number of buyers and consumers. The consumers were then 
in a position of great dependence, but the farmers were in a 
position of great independence. On the basis of free contract 
the farmer had the advantage and the consumer the disad- 
vantage. The farmer was not then heard calling for a limita- 
tion upon the right of contract. He was not demanding the 
substitution of compulsion for freedom. There were demands, 
however, on the part of consumers for government action in 
the fixing of prices and the control of marketing-processes. 
Since he was at a disadvantage in the bargaining process the 
consumer felt that something else should be substituted. Free- 
dom to buy food did not seem so very precious. Farmers, 
however, were then inclined to protest against the substitution 
of compulsion for bargaining ; that is, the substitution of price- 
fixing by the government for the policy of letting demand and 
supply determine the price. At the present time, however, 
(192 1 ), there is a great slump in the prices of farm products, 
and a good many farmers (it is impossible to say how many) 
are again calling for government help of various kinds. 

There was a time in England, following the Black Death, 
when labor seemed to be abnormally scarce as compared with 
what had been known for centuries. The laborer was able to 
bargain to good advantage. He did not then demand anything 
better than free contract in the determination of wages. The 



SOCIALISM 709 

demand for compulsion, however, came from the landowners 
and employing classes, and much severe legislation was passed 
fixing wages and punishing attempts on the part of laborers to 
bargain for higher wages. 

Generally speaking, however, in the history of the greater 
part of the world, conditions have been such that laborers 
rather than employers have been at a disadvantage in bar- 
gaining. Unskilled laborers have generally been abundant. 
It has seldom been necessary for an employer to spend much 
time searching for men who were willing to work for him. The 
searching has been on the other side. Labor being thus almost 
permanently oversupplied, it has led to a great many demands 
for the substitution of compulsion for free bargaining as a 
means of fixing wages. 

Now it is not necessary to have a scourge in order to thin 
out the ranks of unskilled labor. The case of the Black Death 
was cited merely because governments have generally been so 
stupid as to do nothing about it, and here was one case where 
a scourge proved to be in some respects more intelligent and 
generous than governments have been. It is quite possible, by 
the use of a little, intelligence and progressiveness, to create 
conditions under which the demand for labor will continually 
expand and the supply of unskilled labor continually contract, 
putting the unskilled labor in a continually improving situation 
with respect to the bargaining process, making it continually 
easier for the laborer to find a job at remunerative wages but, 
as a necessary consequence, continually more difficult for the 
employer to find unskilled labor at low wages. By this process 
the system of free contract could be preserved and labor could 
be made independent and prosperous at the same time. 

If this were done, in all probability the demand for com- 
pulsion would again come from the employing classes. Find- 
ing themselves at a disadvantage in the bargaining process, 
they would seek government aid in the fixation of wages by 
compulsion. That evil, however, could be combated when 
it arose. 




710 PRINCIPLES OF NATIONAL ECONOMY 

Liberalists and authoritarians. The reformers of our system 
of distribution may therefore be grouped into two main classes, 
— the liberalists and the authoritarians. The authoritarians are 
those who wish to substitute some form of compulsion for the 
system of free contract. The liberalists are those who prefer 
to keep the system of free and voluntary agreement rather than 
resort to compulsion. They rely upon free initiative not only 
in getting things produced but in determining the shares in 
distribution. Further, the authoritarians may be subdivided 
into two classes : first, those who believe in a benevolent des- 
potism, such as that which produced most admirable results 
in the Canal Zone during the building of the Panama Canal 
or that which prevailed before the war in the German Empire ; 
and, second, those who believe in the authority of the mass 
over the individual, where the will of the mass is indicated by 
majority votes and by the election of popular individuals as 
directors and administrators. The liberalists are likewise 
divided into two groups : first, those who believe that there is 
a logical dividing line between the sphere of government action, 
which must always be compulsory, and the sphere of private 
enterprise, which must always be voluntary and on a free con- 
tractual basis ; second, the extreme anarchists who do not be- 
lieve in force or compulsion of any kind, not even the exercise 
of police power, much less of military power. 

The real conflict between authoritarians and liberalists is 
between the two intermediate groups ; namely, those who be- 
lieve in the compulsion of a democratic mass over the individual 
and those who believe in a fairly definite dividing line between 
the sphere of compulsion and the sphere of freedom — in other 
words, it is the conflict between socialism and liberalism as we 
find it in the world today. 

The one thing that unites all who can properly be called 
socialists is their opposition to the private ownership of the 
means of production, such as land, factories, shops, stores, etc. 
There are almost as many working programs for abolishing 
private property in these things as there are socialists. These 



SOCIALISM 711 

working programs, however, fall into two main classes, — the 
political and the militant. By political programs are meant all 
those under which the voting power of the masses, if they can 
ever be persuaded to become socialists in office, is to be used 
for carrying elections, putting socialists in office, enacting legis- 
lation, and changing constitutions so as to take away from 
private individuals the productive property which they now 
possess and put it all into the hands of the public. The public 
in question may be the large group called the state, in which 
case the system is called state socialism ; or it may be a smaller ' 
group, such as a guild, a trade union, a syndic ; or even, in some 
cases, a small territorial group such as a township, in which case 
various names are applied such as guild socialism, syndicalism, 
or the soviet. Even in these cases, however, the larger group, 
called the state, must use its power to dispossess the private 
owners and permit the small groups to take possession. 

By the militant programs are meant all those that proceed 
not to gain control of the existing government by voting but to 
defy it or overthrow it by force. In both cases force is to be 
used to dispossess private owners — in one case it is the force 
of the state, operating by regular, orderly, and constitutional 
methods ; in the other case it is the force of the mob, operating 
in irregular, disorderly, and unconstitutional methods. The 
ultimate effects are practically the same, the difference being 
in the methods by which they are attained. 

Before the World War the kind of socialism most talked 
about was state socialism, or socialism carried out by a large 
group called a state. The war made that type of socialism, 
temporarily at least, unpopular, and it is not much talked about 
now. In its stead socialism under a small group, in some of its 
various phases, is now attracting attention, particularly in 
England and Russia. Germany (where, before the war, the 
advocates of state socialism were strongest, forming the leading 
political party) is now in the hands of the Social Democratic 
party, but this party has given up even state socialism and has 
adopted definitely a program of private capital, as all parties 



712 PRINCIPLES OF NATIONAL ECONOMY 

in all countries will when they are recalled to their senses by 
hard experience. 

Even in Russia, where the extreme wing of the socialist party 
gained control and where the so-called social revolution was 
ushered in with much noise and violence, the experience of the 
Bolsheviki is sobering them down. It was apparent from the 
very beginning that there were only two possible outcomes. 
One was to starve so many people to death or otherwise so 
reduce the population that Russia could, with her rich resources 
'but inefficient social organization, manage to feed and clothe 
her remaining population. The other was that the new govern- 
ment would come back to the essentials of capitalism ; that is, 
the recognition of private property in whatever one has pro- 
duced or bought from the producer on a free and open market. 
Wherever this principle is recognized, there is capitalism be- 
cause men will make tools and also buy and sell them. Who- 
ever makes a tool or buys one is, to the extent of owning that 
tool, a capitalist. Whether the tool is small and cheap or large 
and expensive does not affect the principle. Without a frank 
recognition of this principle no large population ever was or 
ever can be abundantly fed and clothed. Already (1921) the 
essentials of capitalism are being recognized by the soviet gov- 
ernment of Russia, though with infinite effrontery its leaders 
still claim to be leaders of a revolution instead of acknowledg- 
ing that they are making themselves leaders of the inevitable 
counterrevolution. 



CHAPTER LII 



Programs 
OF Recon- 
struction 



Authoritarian 



COMMUNISM 

Autocratic — Kaiserism 

'Under a large group — state 
socialism 

' Syndicalism 
Under a small 
group 



Democratic 



Liberal < 



Guild socialism 
Soviet government 
I. W. W. plans 
1^ . . f Carlyle's benevolent despotism 

.The Canal Zone etc. 

{Philosophical anarchism 
The laissez-faire economist's program 
The balancing-up program 



Compulsion versus freedom. It was pointed out in the chap- 
ter on Labor Programs that the schemes for the improvement 
of the laboring classes fall under two general heads. In this 
chapter we shall discuss some of the more far-reaching plans 
of social reconstruction, as outlined above. The autocratic form 
of authoritarianism (namely, Kaiserism) is, fortunately, dead. 
Among those which rely upon the authority of the mass or 
group over the individual, communism is the most extreme. 
It is sometimes called cooperation, but it is compulsory coopera- 
tion as distinguished from voluntary cooperation. The com- 
pulsion is made complete by the fact that the community, or 
the group, owns all the property and the individual owns none. 
All the processes of production and distribution are carried 
on by the community as a whole rather than by individual 
initiative and voluntary agreements among individuals. 

Meaning of communism. Communism may therefore be de- 
fined as a type of social organization in which all wealth, in- 
cluding both producers' goods and consumers' goods, is owned 
and controlled by the community. It differs from socialism in 

713 



714 PRINCIPLES OF NATIONAL ECONOMY 

that the latter proposes that the community shall own and 
operate only producers' goods, leaving the consumers' goods to 
be owned and enjoyed by individuals. A completely com- 
munistic society, for example, would own the dwelling houses 
and even the food and clothing, but would distribute these to 
the individual members very much as they are now distributed 
within the small group which we call the family. From a cer- 
tain point of view we might say that the ideal family of today is 
a small communistic group in which all property is held in com- 
mon and enjoyed in common rather than separately by the 
individual members of the family. 

Relation to anarchism. Theoretically, communism would be 
at the opposite end of the scale from anarchism, which is an 
absence of all government, — at least the absence of all com- 
pulsory government, In actual discussions, however, it is not 
always easy to distinguish between a communist and an an- 
archist. As a matter of fact, there is a considerable group of 
individuals who call themselves communist-anarchists ; that is, 
they are opposed to any kind of government which resembles 
those with which we are now acquainted. They would sub- 
stitute small communistic groups, each one working more or 
less independently of the others, and make such voluntary 
arrangements for exchange of products as they might find to 
their mutual advantage. In so far as they would oppose all 
compulsion, they would be called anarchists ; in so far as they 
would have all wealth owned in common, at least within small 
groups, they would be called communists. Unless, however, 
the small group could exercise some compulsory control over 
the property of the group, it would be anarchism rather than 
communism. If the group did exercise orderly control over 
its own property to the exclusion of individuals and of rival 
groups, it would be compelled to exercise compulsion and would 
therefore, to that extent, cease to be anarchistic and become 
purely communistic. 

Utopias. Naturally enough, communism has never been 
tried on a large scale. It has been advocated by many 



COMMUNISM 715 

philosophers, both ancient and modern. Many pictures have 
been drawn of ideal societies in which communism was the 
outstanding feature. Plato, in his '' Republic," pictured such 
an ideal commonwealth ; not only was all wealth to be held 
in common, but wives and children likewise. Defective chil- 
dren, or children who seemed likely to be a burden rather 
than a help to the state, were to be disposed of in early 
infancy. Sir Thomas More, in his ^'Utopia," presented another 
picture of an ideal society based upon communism. In order 
to give an impression of reality he pictured some travelers in 
South America who had discovered a new country, in which* 
communism prevailed. Francis Bacon gave us a somewhat 
fragmentary picture of his ideal of society in his ''New At- 
lantis." Tommaso Campanella, in ''The City of the Sun," 
and various other writers have kept alive the ideal of a com- 
munistic society. In more recent times we have such books as 
"News from Nowhere," by William Morris, "The Coopera- 
tive Commonwealth in its Outlines," by Laurence Gronlund, 
and *' Looking Backward," by Edward Bellamy. This is a 
list of distinguished writers, and their books make attractive 
reading. They show pretty clearly how persistently the world 
has dreamed of social conditions in which there should be no 
rivalry of interests, no quarreling and bickerings over questions 
of property, — of mine and thine. 

It is not very difficult to show where these pictures are de- 
fective and how impractical such schemes of social organization 
are. The world at large, or at least a great majority of the 
people of the world, has put very little confidence in these 
proposals, but probably no generation has been without a cer- 
tain number of spirits who have retained their belief in those 
peculiar ideals of justice and economy which these Utopian 
works have set forth. 

Experiments. The primitive Christians. Nor have actual 
experiments been wanting. The primitive Christian Church is 
frequently referred to as an example of communism. One or 
two passages in the Acts of the Apostles indicate that the first 



7i6 PRINCIPLES OF NATIONAL ECONOMY 

Christians, at least, maintained a communistic fund for the 
maintenance of impecunious members. For a short time they 
appear to have put practically all their possessions into a com- 
mon fund. But in addition to this they stopped working and 
remained together in one place, awaiting the second coming of 
the Lord. This makes it appear as though communism had 
not been with them an ideal scheme of social organization but 
merely a convenient arrangement by means of which they could 
live while preparing for the end of the world and their sudden 
translation to heaven. 

The Spartans. The Spartan commonwealth is likewise re- 
ferred to frequently as a communistic society. According to 
the account given in Plutarch's '^Life of Lycurgus," there were 
many communistic features about the life of the Spartans. It 
appears to have been the communism of a military camp, how- 
ever, for the Spartans themselves were only a small clan, or 
caste, ruling over a much larger population of subject people. 
In order that they might be strong in a military sense and hold 
the masses of the people in subjection they organized them- 
selves very much as a military camp has always been organized. 
There was no communism whatever for the mass of the people. 
It extended only to the small aristocratic and ruling class 
called Spartans. 

The monasteries. Most of the monasteries of the Middle 
Ages were organized on a communistic basis. They also prac- 
ticed celibacy, showing that they did not regard communism 
as the ideal basis of a continuing human society. The whole 
monastic life was organized for the purpose of promoting spirit- 
uality rather than for the purpose of reforming human society. 

The Taborites. Certain extreme sects among the early Prot- 
estants attempted some kind of communistic life without ceh- 
bacy, but never made much of a success. Conspicuous among 
these were the Taborites, an extreme faction of the followers 
of John Huss, the Bohemian reformer. They withdrew from 
the city of Prague and started a community on a hill to which 
they gave the name Mount Tabor. They hence became known 



COMMUNISM 717 

as the Taborites. So long as they were thoroughly united by 
their religious sentiments they worked very successfully, not 
only in productive industry but even in war, for the great Aus- 
trian Empire sent army after army against them. They de- 
feated the imperial armies because of the superiority of their 
organization. But eventually dissensions arose among them ; 
they were divided and overthrown, and their community was 
broken up. 

American experiments. America has been a fruitful field for 
the trying-out of all sorts of experiments. Many of the first 
colonists came here because they were inspired by religious 
sentiments. They founded colonies where their religious ideas 
could flourish. This continent presented a virgin field where 
people with peculiar ideals of religious organization or of social 
economy could come and put their ideals to the test. 

The outline on the following page gives a rough classification 
of the more important of these experiments. There were many 
not included in this list, which were either unimportant as to 
numbers or so short-lived as to make them unworthy of men- 
tion. It will be noticed that the long-lived communities were 
all religious in their nature. Of the nonreligious communities 
only one (namely, the Icarians) lasted a single generation, 
whereas several of the religious communities have lasted half a 
century, and one group of communities (namely, the Shakers) 
had several colonies that survived for more than a century. 

Religious communities. Most of the religious communities, 
it will be noticed, are of foreign origin, and most of these are 
of German origin. The Shakers are placed among those of 
American origin. As a religious sect the Shakers originated 
in England, but they made their experiments in communism in 
this country. They have established numerous colonies from 
Maine to Kentucky. They are celibates and therefore could 
have no continuing existence unless they continued to make 
converts. This they have failed to do in recent years, and 
consequently the Shaker communities are dying out as the old 
people drop away. 



, Of American 
origin 



Religious 



American! 
Communistic - 
Society 



Non- 
religious 



Of foreign 
origin 



Owenistic 



Fourieristic 



1 This outline 
Chicago, 1908. 



The Shakers (numerous colonies) 

Maine to Kentuclcy, 1787- 
The Perfectionists of Oneida, N.Y., 

1848-1879 
Zion City, 111., 1890-1896 
Jemima Wilkinson's New Jerusalem, 

N.Y., 1786-1820 
Celesta, Pa., 1852-1864 
Salem-on-Erie, N.Y., 1876 
The Woman's Commonwealth, Texas 

and Washington, D.C., 1880- 
The Lord's Farm, N.J., 1877 
Shalam, or the Children's Land, 

N. Mex., 1884-1901 
Estero, Fla., 1904 
The Christian Commonwealth, Ga., 

1896 
The House of David, Mich. (?) 
' Ephrata, Pa., 1732- 
The Harmonists, Pa., 1803- 
The Separatists of Zbar, Ohio, 18 19- 

1898 
The Amana Society, Iowa, 1843- 
The Bishop Hill Colony, 111., 1846- 

1862 
The Bruederhof Communities, 

S. Dak., 1862 
The Waldensian Colonies, N.C. and 

Texas, 1893- 
^St. Nazianz Colony, Wis., 1854 
TNew Harmony, Ind., 1825-1827 
-| Yellow Springs, Ohio, 1824 
I Numerous others 
Brook Farm, Mass., 1841-1847 
Fruitlands, Mass., 1843 * 
Hopedale, Mass., 1841-1858 
North American Phalanx, N. J., 1843-- 

1856 
Wisconsin Phalanx, Wis., 1844-1850 
Northampton Association, Mass., 

1842-1846 
Numerous others 
TNauvoo, 111., 1 849-1 866 
The IcariansJ Cheltenham, Mo., 1858-1864 
[icaria, Iowa, 1860-1895 
' Skaneateles Community, N.Y., 1844- 

1846 
Polish Colony, Anaheim, Calif., 1876- 

187S 
Topolobampo, Mexico, 1886-1901 
The Ruskin Commonv/ealth, Ga., 

1896-1901 
The Cooperative Brotherhood, 

Wash., 1898- 
Equality Colony, Wash., 1899- 
The Straight Edgers, N.Y., 1899- 
^ The HeHcon Home, 1906-1907- 
is based on "American Communities," by W. A. Hinds. 

718 



^Independents 



COMMUNISM 719 

The Perfectionists originated in Vermont under the leader- 
ship of Mr. John Humphrey Noyes. They afterwards moved 
to Oneida, New York. They have given up communism and 
have organized themselves in the form of a joint-stock society 
and are still prosperous and doing a thriving business. 

A multitude of other experiments of a more or less religious 
nature have been carried out by faith healers, Adventists, and 
other people of rather extreme religious views. 

Of the religious communities of foreign origin, that at 
Ephrata, Pennsylvania, was the first to be organized on a 
durable basis in this country. Like the Shakers, they were 
celibates and were therefore doomed to ultimate extinction. 

One of the most successful of all these experiments was 
started in western Pennsylvania by some German pietists 
among the followers of one Georg Rapp, from whom they were 
given the name of Rappists. They afterwards moved to In- 
diana, where they sojourned for a time at New Harmony, 
in the southwestern corner of the state, After a few years 
they sold out and moved back to Pennsylvania. Their colony, 
known as Economy, was a place for sightseers for many years. 

The Separatists of Zoar and the Amana Society were some- 
what similar in their origin and in their subsequent history. 
They did not practice celibacy. They prospered amazingly 
and presented a very attractive life as seen by visitors from the 
outside. They were animated by intense religious enthusiasm 
and devotion to their own leaders. The Separatists of Zoar, 
however, gave up communism in 1898, largely because the 
younger generation had lost something of the religious zeal of 
the older generations and decided that they preferred the in- 
dividualistic type of life to the communistic. The Amana So- 
ciety is still flourishing, and the people are apparently satisfied. 

The Bishop Hill Colony in Illinois was a Swedish colony. 
In character and organization it resembled most of the others. 
When its members lost their intense religious zeal they likewise 
lost their enthusiasm for the communistic type of life and 
gave it up. 



720 PRINCIPLES OF NATIONAL ECONOMY 

A series of communistic societies is still flourishing in South 
Dakota. They are known as the Brotherhood Societies. 

Several communities of North Italian Protestants have flour- 
ished in the South, particularly in Valdese, North Carolina, and 
near Gainesville, Texas. 

Nonreligious communities. In 1822 Robert Owen, a great 
English philanthropist and a firm believer in what was then 
called socialism, came to America for the purpose of establish- 
ing an ideal community. He delivered many addresses and 
created much enthusiasm. In looking about for a location he 
found that the Harmonists, who were then living in New Har- 
mony, Indiana, were desirous of selling out and moving back 
to Pennsylvania. He bought all their real estate and pro- 
ceeded to establish a colony of his own. He was a man of great 
ability, who had made a fortune of his own, which he devoted 
liberally to the propagation of his ideas. His colony, however, 
was made up of idealists who were more in the habit of talking 
about their theories ,of society than of working to produce 
wealth ; it was a good illustration of the inability of any com- 
munity to live on talk. It lasted a little over two years. Nu- 
merous other experiments of the same kind were tried, none 
of which lasted for a single year. One at Yellow Springs, Ohio, 
lasted for several months. 

About 1 84 1 the works of a French communist, Fourier, were 
translated and published in this country. They created great 
enthusiasm, and a large number of experiments were made. 
The most notable of these was Brook Farm, Massachusetts, 
which was started independently but afterward adopted the 
plan of Fourier. This experiment was notable mainly because 
of the great names in its Kst of members. Some of the most 
distinguished men and women of that day, in letters and in 
scholarship, joined the Brook Farm community. The most 
successful of the Fourier experiments, however, was the North 
American Phalanx in New Jersey. It lasted for thirteen years. 
An experiment at Hopedale, Massachusetts, was only partially 



COMMUNISM 721 

communistic; it lasted seventeen years and then became a 
joint-stock association. 

As indicated above, the most successful of all the nonreligious 
communities in this country was the Icarian community in Iowa. 
Its members were followers of Etienne Cabet, a French com- 
munist, who wrote a very attractive book entitled '^A Voyage 
in Icaria." It awoke the slumbering idealism of many French 
people who desired to form a commonwealth after the descrip- 
tion of the life of the Icarians. Cabet led his followers to this 
country and landed in New Orleans, hoping to establish them 
in northeastern Texas. The land proved to be inaccessible and 
the climate not very agreeable. They returned to New Orleans 
discouraged, but learned that the IMormons had recently been 
driven out of Nauvoo, Illinois. They proceeded by boat to 
Nauvoo and established themselves, finding plenty of vacant 
houses and factory buildings. Here they prospered for a num- 
ber of years, but they wished to find a situation where they 
could be more to themselves, and a tract of land was bought in 
southwestern Iowa, not very far from the present town of 
Corning. There they lived under the communistic system until 
1895, when they gave up communism and came over to an 
individualistic regime. 

A large number of other societies have been established 
by the followers both of Robert Owen and of Fourier and, 
in recent years, by the admirers of Laurence Gronlund and 
Edward Bellamy. 

Results. It may seem as though the experiences of these 
numerous communistic societies tended to throw discredit upon 
all communistic ideals. The advocates of communism, however, 
insist that the principles of communism are still sound, even 
though a thousand communities have failed. To an impartial 
observer it looks as though communism might work very well 
if people were built on a communistic plan. If they have a 
passion for communism, or a powerful religious emotion which 
will overcome their individualistic and particularistic tend- 



72 2 PRINCIPLES OF NATIONAL ECONOMY 

encies, they may live together peaceably under communism. 
Unless they are inspired with religious zeal or a genuine pas- 
sion for communism, it seems as though the natural individ- 
uality, not to say the contrariness, of human nature would 
continue to break up all communistic societies in the future 
as it has in the past. 

But why, it may be asked, will not communism work in a 
large national group as it now works in a small family group ? 
It does not seem to work particularly well in some families. In 
those few abnormal cases where the members of the family 
have no particular affection for one another, the question of 
the division of the family funds is a difficult one. If the father 
is selfish and cares nothing for the others he becomes an auto- 
crat and spends all or the greater part of his income upon him- 
self. If the others feel the same way toward him and one 
another they quarrel among themselves. But in a normal case, 
where an intense affection for one another prevails, there is 
no quarreling and everything is shared in common. 

If it were possible for the members of a large national group 
to feel toward one another as do the members of a normal 
family, communism or almost any other system might work 
well. But the average man's capacity for affection is limited. 
It would take one with a genius for friendship to feel a warm 
affection for even a hundred -separate individuals, to say noth- 
ing of a hundred million. It would be practically impossible 
for any of us to feel toward each and every one of a hundred 
million people, only a few of whom we had ever seen, precisely 
as we do toward our own brothers and sisters, fathers and 
mothers, and other very near relatives. This is sufficient reason 
why communism cannot be made to work well. 



CHAPTER LIII 
ANARCHISM 

In some respects anarchism is the diametric opposite of 
communism and almost the diametric opposite of sociaHsm ; in 
other respects it is somewhat similar to both. Anarchism and 
socialism represent opposite tendencies in that the socialist pro- 
poses to enlarge the power and function either of the state or of 
some kind of public organization, whereas the anarchist pro- 
poses to eliminate all authority, or all control of one person by 
another. Such organization as shall exist under anarchism 
shall be purely voluntary. Voluntary groups may be formed 
as large or as small as the individual members care to have 
them. The relations of one group to another shall likewise be 
on a purely voluntary or contractual basis. There shall be no 
state with a military arm or with police power of any kind. 

Anarchism and socialism resemble each other in that both 
revolt, either in part or in whole^ against any system which 
gives one man power or authority over another. Many of the 
advocates of socialism object to private capital primarily on the 
ground that it gives one man (namely, the capitalist employer) 
power and authority over another man, the propertyless laborer. 
The anarchist says, regarding this opinion : '' It is good so far 
as it goes. We anarchists are likewise opposed to giving one 
man power or authority over another. The private ownership 
of capital does what the socialist says it does, and that is wrong. 
We are therefore opposed to the private ownership of capital. 
But capital is not the only source of authority. The government 
likewise gives one man power or authority over another ; the 
capitalist employer does not in fact have as much power or 
authority as a judge or a policeman, a governor or a president. 
The socialist, therefore, is only a halfway anarchist. He is 

7-3 



724 PRINCIPLES OF NATIONAL ECONOMY 

opposed to one source of power and authority ; we are opposed 
to both sources." 

May government eventually become unnecessary ? The un- 
derlying philosophy of anarchism is of various kinds. There is 
one system of thought which is frequently but improperly 
called anarchistic. It is held by certain people that government 
and compulsion are made necessary by the imperfections in 
human nature, — that if we were so highly developed morally 
that each individual would voluntarily do what he ought to do 
or what was in the public interest, then it would not be neces- 
sary to use authority or compulsion on anybody ; but that since 
there are individuals with undeveloped moral natures, — indi- 
viduals who do not voluntarily and automatically respond to 
the needs of society, — it is therefore necessary that they be 
compelled to do what they ought to do, or (which is the same 
thing) what they would do if they were fully developed. 

In the closing paragraphs of his monumental work on sociol- 
ogy, which was in turn the culmination of his great system of 
synthetic philosophy, Herbert Spencer^ sums up his ideas as to 
the ultimate end of all social progress in the following eloquent 
words : 

But if the process of evolution which, unceasing throughout past 
time, has brought life to its present height, continues throughout the 
future, as we cannot but anticipate, then, amid all the rhythmical 
changes in each society, amid all the lives and deaths of nations, 
amid all the supplantings of race by race, there will go on that 
adaptation of human nature to the social state which began when 
savages first gathered together into hordes for mutual defence — an 
adaptation finally complete. ... 

On the one hand, by continual repression of aggressive instincts 
and exercise of feelings which prompt ministration to public welfare, 
and on the other hand by the lapse of restraints, gradually becoming 
less necessary, there must be produced a kind of man so consti- 
tuted that while fulfilling his own desires he fulfils also the social 
needs. . . . 

iThe Principles of Sociology (second edition), Vol. Ill, pp. 598-601. 
London, 1897. 



ANARCHISM 725 

Long studies . . . have not caused me to recede from the behef 
expressed nearly fifty years ago that — ''the ultimate man will be 
one whose private requirements coincide with the public ones. He 
will be that manner of man who, in spontaneously fulfdling his own 
nature, incidentally performs the functions of a social unit ; and yet 
is only enabled so to fulfil his ov/n nature bv all the others doing 
the like." 

Whether this delectable state is to be reached by the slow and 
somewhat cruel process of evolution^ as Spencer believes, or 
by the process of moral reform and religious evangelism, may 
be open to speculation. There are probably not many people 
who disagree with the general conclusion that government 
would be unnecessary in either case. If (but this is a large 
''if") human nature could be so perfected, either by the slow 
elimination of the unsocial and the antisocial (that is, the crim- 
inal and the immoral) or by their moral regeneration, it might 
very easily follow that government would ultimately become 
unnecessary, or at least that compulsion by governmental 
authority would become a thing of the past. This position, how- 
ever, can hardly be. called anarchistic in any real sense, for the 
real anarchist believes not that government may ultimately 
become unnecessary but that it is now unnecessary. 

Impatience of restraint. There is another type of thought, 
sometimes characterized as anarchistic^ which does not revolt 
so much against government and the use of compulsion in the 
form of police power as against what is called moral compul- 
sion ; that is, the setting up by society, or by people in author- 
ity, of standards which others are bound to follow. It is 
proposed, therefore, that we throw off the so-called shackles of 
conventionality and even of morality, and that everyone do 
that which is right in his own eyes, regardless of what may be 
said by other people or by institutions and organizations which 
pretend to tell us what we ought to do. 

Is morality an invention of weaklings to curb the strong? 
Among the people who take this point of view, however, two 
diametrically opposite conclusions are reached. There is one 



72 6 PRINCIPLES OF NATIONAL ECONOMY 

school represented by such writers as Kaspar Schmidt and 
Friedrich Nietzsche, who hold that religion and morality are 
the inventions of the weaklings of the world for the purpose of 
holding the strong in check. There is an old fable regarding 
the mice who found themselves oppressed by the cat. They 
voted unanimously that the cat should wear a bell in order 
that the mice might be protected. According to these writers 
religion and morality are merely different ways by which mice 
try to put the bell on the cat. They try to make it unpopular 
for the strong man to use his strength. They persuade him that 
it is immoral or irreligious, or that the vengeance of super- 
natural agencies will be let loose upon him if he exercises his 
strength to the detriment of the masses. Therefore the strong 
man, sometimes called the superman, should break loose from 
these conventionalities, should snap the cords with which the 
Lilliputians have bound him, and should dare to be great and 
independent, and impose his will on the masses if he is able 
to do so. 

Is morality an invention of those in power to curb the masses ? 
The other school of anarchists, and certain socialists who are 
anarchistic in spirit if not in program, assert that religion and 
morality are the cunning inventions of priests, soldiers, and 
capitalists for the purpose of holding the masses in check ; that 
for the average man to be good is merely to be good for some- 
body else — that is, for those in power; that to be good is to 
support the priest or the capitalist or the policeman or the 
judge or someone else in authority; that to be free is to be 
good to oneself. 

As to which of these two conclusions is the more absurd, it 
would be difficult to decide. They are mentioned to show to 
what extremes of aberration the human mind is capable of 
going. One doctrine would lead the strong man to do as he 
pleased, to impose his will upon his neighbors either by the 
weight of his fist or by his superior power of destruction in 
some other form ; the other conclusion would lead the masses of 
the people to sink into a state of license and violence which 



ANARCHISM 727 

would destroy civilization and land us in a sort of primeval 
social chaos. 

Are all human interests harmonious ? There is, however, an- 
other system of thought which is truly anarchistic and less 
repulsive than either of these. This system is based on the 
fundamental assumption that all human interests are harmoni- 
ous. In this best of all possible worlds, it is claimed, there can 
be no such thing as a conflict of human interests ; it is in some 
way a reflection upon the Creator of the world to say that there 
could be anything but a harmony of real interests among men ; 
it cannot possibly be true that one man's meat is another man's 
poison ; these apparent conflicts are the creation of men and 
human institutions and are not inherent in the nature of man 
and the universe. 

This underlying assumption sounds attractive, and doubtless 
many of us would like to believe it if we could. There are, 
however, so many hard facts in the way that not many of us 
are able to bring ourselves to the point of ignoring the very 
present and prevalent conflict of interests. It was shown in 
the chapter on Scarcity that the mere fact of a congestion of 
population — of too many people's trying to live in one spot — 
creates in that spot a state of scarcity. Food enough in that 
particular spot cannot be produced for as many people as would 
like to live there. This situation in itself inevitably and neces- 
sarily produces a conflict of interests. Either some people must 
move to another spot or food must be brought from other spots 
to feed the people who are there. Either alternative will prove 
disagreeable to somebody. If neither of these alternatives is 
chosen, then there must be hunger ; more than one person will 
be wanting each parcel of food, and this in itself is a conflict 
of interests. Here are certain facts of a physical nature which 
cannot by any efi'ort of the will or the imagination be conjured 
out of existence. There is, in fact, a conflict of interests 
wherever two people want the same thing. 

Conflict of interests makes control necessary. Wherever there 
is a conflict of interests, one of two things is absolutely nee- 



72 8 PRINCIPLES OF NATIONAL ECONOMY 

essary : either the individuals must have a high moral develop- 
ment, which will lead each one to surrender certain interests 
in favor of others, or there must be an umpire to decide 
between them and enforce his decision. This umpire, by what- 
ever name he may be called, exercises the function of govern- 
ment. In fact, this umpire is government, whether it be an 
individual or a great organization of individuals exercising 
various functions, such as legislation, administration, interpre- 
tation, enforcement, and so on. 

Emotional anarchism. There is another type of anarchism 
which can scarcely be said to have any underlying philosophy. 
It is based wholly on feeling and sentiment. Doubtless every 
human being possesses some repugnance toward being ruled, — 
toward being compelled to do that which he dislikes to do, or to 
leave undone that which he would like to do. A preference 
for one's own way shows itself rather early in the lives of 
children. Doubtless all of us feel bitter at times regarding 
some act of some governing agency or authority. Generally, 
however, we are able to keep these feelings under sufficient con- 
trol to enable us to obey the law and support the government. 
In other words, we generally see the necessity of government, 
however disagreeable it is at times to be forced to submit. 
Occasionally, however, an individual will react in the other 
way ; that is, his repugnance will overcome his judgment. He 
has no particular philosophy, though he can always invent a 
reason or an excuse. A policeman, a court, a flag, or any other 
evidence or symbol of government is as a red flag in his face ; 
it causes anger, resentment, and insurgency, and nothing else. 
Such people are sometimes very likable in other respects. So 
long as their feelings are properly soothed they may be exceed- 
ingly amiable and even affectionate. Those who know them 
personally find it difficult to reconcile their general personal 
qualities with their feeling against government. Nevertheless, 
from any broad and philosophical point of view they are among 
the most dangerous members of society. They are the un- 
adapted in a very important social and psychological sense. 



ANARCHISM 729 

Psychologically they are as unfit for living under a settled, 
orderly government as a fish is physically unfit for living out 
of water. The process of evolution which, according to Spencer, 
would eventually produce the delectable state of society de- 
scribed in the above extract is steadily weeding such people out. 
They insist on bumping their heads against the walls of the 
universe and destroying themselves along with the criminals 
and others who are unadapted to a settled civil life. If by 
the meek we mean merely the adaptable, the teachable, and the 
reasonable, and if by the unmeek we mean the intractable, the 
unteachable, the self-willed, the pig-headed, then it is probably 
a scientific proposition to say that the meek ''shall inherit the 
earth " ; that is, survive, while the unmeek shall be exterminated 
by the slow but sure process of ^volution. This will be the 
ultimate cure for this type of anarchism. 

There is still another type of anarchist who is merely mean 
and bent on making trouble. He can always be relied upon to 
be on the wrong side of every question. Wherever decent, self- 
respecting men and women are in general agreement on any 
subject, he will always be found opposing them. It is true he 
does not always go in for anarchism. He is found in every 
movement which gives him a chance to vent his general hate 
and spitefulness. Wherever there is a chance to denounce gov- 
ernment, religion, law, order, morality, chastity, sobriety, or 
anything else that is of good report, his voice is always heard. 
He generally tries to get into good company by calling himself 
a radical, an iconoclast, or a revolutionist, knowing that excel- 
lent men and women have been called by all of these names. 
He is only another type of that numerous class which cannot 
stand even the moderate degree of civilization to which we 
have attained, and would, if he could, drive us back to savagery. 

Is patriotism a vice ? There are various other views, some 
of them of an idealistic nature, which savor of anarchism and 
lead to absurd conclusions on practical subjects. One of these 
is that patriotism is a vice. This strange doctrine is advanced 
on grounds of the broadest humanitarianism. We should love 



730 PRINCIPLES OF NATIONAL ECONOMY 

all men equally^ it is urged, without regard to race, color, creed, 
or nationality. The patriot cares more for his fellow citizens 
than for the citizens of other countries ; therefore, according to 
this type of anarchism, he is narrow in his views. Moreover, if 
he thinks more of his fellow citizens than of others, this will 
lead him, in case of war, to try to kill the citizens of the 
enemy country. Killing, it is argued, is murder. The fact that 
it is done as an act of war does not in the slightest degree 
change its character. 

When a great world state exists, then, of course, it will be 
proper to be patriotic toward it. We may even work consist- 
ently for it. But to condemn all patriotism for lesser states 
would, if this condemnation were effective, merely destroy 
existing states and all law and order and plunge the world in 
chaos. Family sentiment is narrow in the same sense that 
national sentiment is narrow. The man who loves his wife 
must care more for her than for other women. This and all 
other forms of family sentiment may, in a sense, make us 
narrow, but it does not follow that it is unwise or uneconomical 
to be narrow. Again, if we are to avoid narrowness, why be 
humanitarians? Are not many animals also companionable 
and lovable ? To show a preference for men as against animals 
or even microbes is to be narrow in the sense in which these 
people have been using that word. 



CHAPTER LIV 
THE SINGLE TAX 

Meaning of the single tax. By the single tax is meant a 
policy under which all the public revenue is to be raised by the 
single tax on land value. One of the most persistent misin- 
terpretations of the single tax is that of assuming that it means 
a tax to be raised on real estate rather than on land values. 
Land value is defined as the value of the land itself irrespective 
of all improvements, such as ditching, draining, fencing, the 
planting of trees, and the erection of buildings. In short, every- 
thing done on the land itself to improve the value of an estate 
is classed as an improvement and, under the single tax, would 
be exempt from taxation. This leaves nothing except the loca- 
tion value and the fertility value to be taxed. 

The physiocrats, believers in the "rule of nature," believed in 
the impbt unique. The original advocates of the single tax were 
a group of French economists called physiocrats. It was their 
belief that land was the original and fundamental source of all 
wealth, and that the rent of land was the only real surplus 
wealth which the community ever produced. From their point 
of view, rent was due to the bounty of nature. They believed 
that every other tax must eventually be paid out of rent any- 
way, wherever it may have been laid by the government. If 
we tax the products of industries, there is no surplus out of 
which the tax can be paid ; as a result we either raise their price 
or depress the price of the raw materials. If we tax labor we 
must raise wages accordingly; if we tax enterprise we must 
raise profits. Every tax, therefore, is shifted from one to 
another till it reaches the landowner, who alone has a surplus 
out of which it can be paid. The landowner cannot shift it any 
farther, and, since he must ultimately pay the tax, the physio- 
crats argued that it was better for him to pay it directly in the 

73' 



732 PRINCIPLES OF NATIONAL ECONOMY 

first place than indirectly after several shif tings from one person 
to another. They regarded the single tax as a good system of 
taxation for raising revenue, not as an engine of social reform. 

The classical economist regarded rent as a peculiar income. 
The idea that landowners who live entirely upon the rent of 
land are in a peculiar sense nonproducers is by no means new. 
Adam Smith ^ wrote, in 1776, ''As soon as the land of any 
country has all become private property, the landlords, like all 
other men, love to reap where they never sowed, and demand a 
rent even for its natural produce." And again, "They [the 
landlords] are the only one of the three orders whose revenue 
costs them neither labor nor care, but comes to them, as it 
were, of its own accord, and independent of any plan or 
project of their own."^ Economists from Adam Smith down 
have generally agreed on this point, though they have not gen- 
erally agreed that this is the great cause of poverty, nor that the 
abolition of ground rent would be a social panacea. 

Ricardo, in developing his theory of rent, laid emphasis upon 
the fact that rent arises from the niggardliness rather than from 
the bounty of nature, thus taking a position opposed to that 
of the French physiocrats. This niggardliness shows itself in 
two ways : first, the best land is always limited in area ; second, 
its productivity is limited. On any given area the amount of 
any crop which can be produced is limited ; and even before 
that limit is reached, diminishing returns are received from 
successive applications of labor and capital. Because of these 
limitations upon the productivity of the best land, poorer and 
poorer land must be taken into cultivation as the demand for 
products increases. The fortunate possessors of the better 
grades of land are then in a position to demand a rent for 
their land. 

The single tax made an engine of social reform by Henry 
George. It was the late Henry George, in his book entitled 
''Progress and Poverty," who seized upon these ideas to make 

1 Wealth of Nations, Bk. I, chap. vi. 
2\Yealth of Nations, Bk. I, chap. xi. 



THE SINGLE TAX 733 

the single tax an engine of social reform. He began his inquiry 
by pointing out that even in the midst of plenty, poverty still 
persisted. He stated that though the productive power of the 
world had increased many fold through mechanical improve- 
ments, nevertheless large numbers of people remained in pov- 
erty. In fact, he went so far as to insist that increasing numbers 
were compelled to live in conditions of increasing squalor. 

The persistence of poverty the great reproach upon civilization. 
This phenomenon of the persistence of poverty in spite of the 
world's increase in productive power has been an enigma ever 
since the rise of mechanical industries. Various answers have 
been given to the puzzle. Karl Marx and his followers attrib- 
uted it to the fact that the owners of capital absorb all the bene- 
fits of the increase in productive power, leaving the nonowners 
of capital no advantage whatsoever. 

It is very easy to say — in fact, it looks like mere arithmetic 
to say — that, with the same rate of productiveness, if certain 
classes who are now receiving large incomes should not receive 
them, there would be more left for other people. If the incomes 
of capitalists and landowners were cut off, more would be left 
for the laborers, provided the total production remained the 
same. It would be equally true from an arithmetical stand- 
point to say that if the skilled laborers and tl)e high-salaried 
people did not receive so much, more would be left for the rest, 
if the rate of production remained the same. In other words, 
if one assumes a given rate of production, and then assumes 
that the incomes of certain classes are cut off, one can demon- 
strate that this would leave more goods for the other classes. 
This, however, is not a convincing argument. If anyone per- 
forms an important function in society, and thereby makes 
society richer, it cannot be said that by cutting off this person's 
reward for performing his function, society will be improved. 
By the cutting off of his reward there is the danger of killing the 
goose that laid the golden eggs : by so doing we may reduce 
his motive for labor and cause him to perform a less important 
function than he would if he were adequately rewarded for his 



734 PRINCIPLES OF NATIONAL ECONOMY 

effort. The real question is, therefore, whether the capitalist 
performs a function in society commensurate with the reward 
which he receives. If the answer is in the affirmative the cutting 
off of his income would hardly be a help to society. The same 
reasoning applies to the landowner : if he performs a function 
commensurate with the reward which he receives, it would 
obviously not help matters to cut off his income. So here again 
the real question is whether or not the landowner performs a 
function commensurate with the reward which he receives. 

Distinction between location value and fertility value. In 
Chapter XVI we saw that the two economic factors in land 
value are location and fertility. In so far as the value of land 
is based primarily on its fertility, that value may be easily 
destroyed and with difficulty replaced ; and in fact the land of 
little fertility may, by careful and scientific farming, be greatly 
increased in fertility. This increase would be classed as im- 
provement, and the increase in value would be similar to the 
increase which results from ditching, draining, irrigating, fenc- 
ing, clearing, and other forms of improvement. Even where the 
land possesses original fertility (that is, where it is known as 
virgin soil) it may easily deteriorate under bad management or 
improve under good management. It is as much in the interest 
of society that good land be kept from deteriorating as that 
poor land be improved in fertility. If the owner of land is 
allowed the advantages of any improvements in fertility which 
result from his management, no one could of course consistently 
object to it. Again, if he is made to suffer some penalty for 
allowing the land to deteriorate in fertility by his bad manage- 
ment, it would seem equally just. 

Putting these two propositions together, it seems as though 
the owner of the land, whether it be good or poor land, should 
be rewarded for any improvement resulting from his good 
management and penalized for any deterioration resulting from 
his bad management. If the single tax were applied rigidly, 
and the value not only of the location but of the soil itself 
were taxed away, the owner would get neither reward nor pen- 



THE SINGLE TAX 735 

alty. That is to say, if he were taxed for the full value of his 
land, while the soil possessed its original fertility, he could 
easily ''mine" the soil, as it is called ; that is, he could rapidly 
exhaust the fertility and pocket the temporary advantage from 
it. Then, after the land became less valuable, the tax would 
have to come down or the owner could abandon the land or turn 
it over to the state whenever it became so poor as not to be 
worth the tax. 

But if he is allowed the full value of the fertility of his soil 
he has a much stronger motive for preserving or increasing its 
fertility. In the pursuit of this advantage, or in the warding 
off of the disadvantage of deterioration, he performs an impor- 
tant public function, — that of conserving the fertility of the 
soil. His reward will bear some ratio to the value of the service 
which he performs. To cut off his reward would not be to the 
advantage of the public, because the result would be that he 
would allow the soil to deteriorate, and this would result in a 
smaller production. The rest of society would suffer from this 
policy along with the landowner. The single tax would put the 
owner in the position of a tenant who had to pay the state, in 
the form of a tax, all that the land would rent for. Tenants are 
notoriously and for excellent reasons careless in the matter of 
conserving soil fertility. 

In respect to location value this argument scarcely applies. 
In some cases, it is true, the enterprise of the landowner has 
created location value. This occurs when he himself builds a 
road instead of asking the public to do it, or when he beautifies 
a spot and makes it attractive as a place for dwellers, or when 
he builds a trolley hne or any other means of access to his land. 
He may then be said to have created the location value of his 
land. In such cases all that we have said regarding fertility 
value will apply also to location value. 

In most cases, however, the location value is not the creation 
of the individual owner but of the general public, since it is the 
general public, rather than the individual owner, that builds 
schools, libraries, and streets, maintains police systems, and 



736 PRINCIPLES OF NATIONAL ECONOMY 

brings various utilities within reach. Many notorious cases are 
cited of men who have bought land favorably situated and have 
done nothing to improve it, having even resisted taxation and 
all improvements. Yet in spite of such inertia these men have 
found themselves rich as the result of the rise in the location 
value of the land. A few such conspicuous cases furnish popu- 
lar arguments in favor of the single tax, though they are of no 
great scientific value unless they are numerous enough to absorb 
an appreciable fraction of the national wealth. 

A land tax not necessarily a single tax. The arguments for 
a single tax are not the same as for a mere increase of the land 
tax. One may favor the increase of taxation upon the location 
value of land without being in any sense of the word a single- 
taxer. He may believe in many different taxes, such as the 
inheritance tax, licenses, the income tax, etc. It would be 
absurd to call such a man a single-taxer, even though he favored 
a special tax on the location value of land. Again, even though 
one were in the strict sense of the word a single-taxer, one might 
advocate it on purely financial grounds rather than on the 
grounds of social reform ; that is, one might believe that all 
public revenues should be raised from the taxation of location 
values of land merely because he believed that this would be an 
easy way of raising revenue, and not because it would go very 
far toward the curing of poverty. 

The financial arguments in favor of the land tax are fairly 
simple. Land cannot be hidden in the way that much personal 
property is. There may be some difficulty in appraising its 
value for purposes of taxation, but the difficulty is not greater 
than that of appraising for purposes of taxation the value of 
personal property, buildings, or anything else which is taxable. 

Again, a tax on location values could hardly be said to have a 
repressive effect at all. If the tax on the products of industries 
tends to discourage production, this cannot be said to be true 
of land. Since location values are not produced by the payer 
of the tax, there is no production to discourage. You may tax 
land and still have it in undiminished quantities. As a cold- 



THE SINGLE TAX 737 

blooded financial proposition this has some merit. Even though 
one may take away from the landowner all its location value, 
the land itself still exists in undiminished quantities, and its 
productivity is in no way affected. 

Arguments for the single tax. The argument for the single 
tax as an engine of social reform rests on three general propo- 
sitions. In the first place, since those who receive rent because 
of the location of their land create nothing in return for the 
rent they receive, their incomes are merely subtracted from 
those of the rest of society. If their incomes should be taken 
away, this would not in any degree diminish the total produc- 
tiveness of the community. By a mere process of arithmetic 
it is easy to show that if the incomes which they now receive 
were divided among the rest of the people, these other people 
would have larger incomes. 

Is land kept out of use for speculation ? In the second 
place, it is alleged that a great deal of land is kept out of use for 
speculative purposes and that a high tax on land values would 
force this land into use. The validity of this argument is 
doubtful. The illustrations given are usually those of tracts of 
land found lying idle in cities and suburbs. The owners are 
holding them apparently in the hope of getting a higher price 
in the future. It is easy to jump to the conclusion that if there 
were no prospect of gain by so doing, the owners would at once 
find a use for the land or sell it to others who could use it ; but 
this does not take into consideration the fact that there may be 
no immediate use to which the owner could profitably put 
the land. 

If an individual, Jones by name, has a tract of land which is 
not being used, there is no reason for believing that he would 
be averse to getting some income year by year while the land 
itself is rising in value on his hands. Thus he would get the 
rise of the value of the land just the same as though it were 
idle, and he would get, at the same time, whatever income it 
would bring him. There are not many men who deliberately 
prefer a smaller to a larger income. If he knew that by putting 



738 PRINCIPLES OF NATIONAL ECONOMY 

liooo into even a small building or $100,000 into a large one 
he could rent the building for enough to pay the interest on 
what it cost him, together with insurance, deterioration, etc., 
and have left even a small sum in addition, he would certainly 
be willing to have the small additional sum. If, however, he 
did not see the opportunity to use or rent such a building, but, 
on the contrary, foresaw that he would be obliged to lose a part 
of the interest, insurance, or deterioration, there would be no 
motive for him to have it built. In that case, even if he had to 
pay the single tax, he would still leave the land idle. He would 
rather pay the single tax without additional loss than to pay it 
and incur an additional loss besides. 

The only common cases in which the land is actually kept out 
of use because of speculation are where garden land is pur- 
chased and divided into building lots in advance of the demand 
for them. After the division has been made the land is no 
.longer suitable for farm land or garden tracts because it is 
broken up into parcels too small to be cultivated economically. 
Meanwhile the public may be slow in buying the lots for build- 
ing. The result is that for a number of years this land practi- 
cally goes to waste. 

A heavy tax on land would exempt other forms of property. 
A third argument for the single tax is to the effect that when a 
large amount of revenue is raised from a tax on land, there is no 
necessity for so high a tax — probably no necessity for any tax 
whatever— on other things. This reduction of taxation on 
other forms of property would serve as a stimulus to greater 
production. When, for instance, a farmer finds that his cattle, 
his crops, and his buildings are not taxed, or not taxed so heav- 
ily, he is encouraged to develop these forms of property. If, as 
stated above, the taxation of location values of land enables 
the public to raise enough revenue from this source and thereby 
to eliminate the taxes on all other things, this will tend to stimu- 
late business and production in general. This argument is 
based on the repressive character of other forms of taxation 
than the land tax. 



THE SINGLE TAX 739 

It is probably true that if the incomes of landowners which 
come to them in the form of rent or location value were cut off, 
more would be left to divide among others ; that if land values 
were taxed away, a few owners would be forced to use land 
which is now idle ; and that if a heavy tax were put on the 
location value of land, the taxes on other things could be greatly 
reduced, thereby stimulating production. The combined result 
of these three things would be to the profit of the nonlandowning 
classes. The unskilled laborers and other poor people would 
probably gain a fraction of this general advantage, along with 
all other nonlandowning classes, such as merchants, bankers, 
manufacturers, professional men, and skilled laborers ; but 
that it would greatly alleviate poverty is a proposition which 
may be regarded as very doubtful. 

Putting idle talent to work. A fourth argument, not usually 
brought forward by single-taxers, may be added to this list. In 
so far as certain owners of valuable land are enabled to live on 
the rent which comes to them because of its location value and 
to remain idle instead of doing productive work, the community 
loses the productive power of these men. This is more impor- 
tant than all the land kept out of use for speculative purposes. 
If such persons were deprived of their incomes and thereby 
forced to do productive work, the community would gain by 
this addition to its list of productive workers. This would make 
for national prosperity. How great would be the gain to be 
expected from this source would depend upon how many men 
of talent are kept out of productive work by reason of their 
ability to live idly on the rent which they receive from the loca- 
tion value of their land. If only a few such men are to be found 
the loss may not be worth considering. If there is a large 
leisure class supported mainly from the rent of land, it con- 
stitutes a serious drag upon the prosperity and progress of the 
country. If this class could be made to earn its living in useful 
work, it would be an important factor in national prosperity. 



CHAPTER LV 
THE LIMITS OF STATE INTERFERENCE 

"There ought to be a law against it ! " is a statement that we 
hear on every hand nowadays, regarding almost anything that 
the speaker does not happen to like. So long as this statement 
merely expresses the speaker's opinion that something or other 
ought not to be, or so long as it is merely an expression of his 
disapproval of something that is taking place, it does no harm ; 
but when it is taken literally by voters and lawmakers they are 
likely to attempt to regulate a multitude of things by law which 
would be better left unregulated. To say, however, that a thing 
would be better left unregulated is not the same as saying that 
it is right or that it is working satisfactorily. It may merely 
mean that more harm will be done in trying to regulate it 
than the thing would do if it were left unregulated. 

Some control necessary. It was shown in Chapter V that 
some degree of government control over individual conduct is 
necessary, first, because of certain conflicts of interest among 
individuals and, second, because of the incompetence of cer- 
tain defective individuals or individuals of low mentality to 
look after their own interests. No economist has ever ques- 
tioned the necessity of some government control over the activi- 
ties of individuals. How far the state should go in its regulation 
and control of individual conduct is a matter upon which there 
is a wide difference of opinion. One school has inclined toward 
a restriction of government control to a few of the most im- 
portant cases, leaving the individual of mature years and sound 
mind to find his own place in the economic system and to make 
his own economic adjustment to his fellows on the basis of 
voluntary agreement or free contract. Other schools advocate 
a general extension of the authority and control of the govern- 

740 



THE LIMITS OF STATE INTERFERENCE 741 

ment over more and more of the affairs of individuals, grad- 
ually enlarging the field wherein things are done under the 
system of authority and obedience and narrowing down the 
field wherein they are done by voluntary agreement among free 
citizens. The term laissez-faire is sometimes applied to the 
former school, implying that its followers believe in the "let go" 
or "let alone" policy of government. Various names are ap- 
plied to the other schools, depending upon how far they pro- 
pose to extend the field of authority and obedience or to restrict 
the field of voluntary agreement or free contract. 

The laissez-faire school. We shall consider, first, the laissez- 
faire school and the underlying assumptions on which its 
policy must be based. There has been much misapprehension 
on this subject and not a little misstatement. A recent book, 
"Economics for the General Reader,"^ by Henry Clay, states 
four assumptions as underlying the laissez-faire policy : ( i ) that 
of rational self-interest, or "that individuals in their economic 
relations can be relied on to pursue their own interest, and 
that their action will be rational and informed"; (2) that 
competition leads to the survival of the fittest, or "that com- 
petition in industry will result in the survival of the socially 
fittest"; (3) that wealth will ordinarily be the result of social 
service, or "that as a rule private wealth or property will be 
acquired only by service"; and (4) that market values and 
social values are identical, or "that market values correspond 
roughly with social values and are an adequate indicator of 
need for production to follow." 

It may be true that there have been advocates of a laissez- 
faire policy who have made some or all of these assumptions. 
If one believed that government was omniscient and omnipotent 
and could without difficulty and without cost, either in the 
form of money, man power, or irritation, control human con- 
duct in any way it saw to be wise, then the best rec'\son one 
could give for government's keeping its hands off, or letting 
things alone, would be that things were working well enough 

1 Pp. 370-371. New York, 1919. 



742 PRINCIPLES OF NATIONAL ECONOMY 

anyway and could not be improved even by such an ideally 
perfect government. If anyone saw anything going wrong or 
anyone doing that which was socially inexpedient, and if he 
understood that an all-wise and all-powerful government could, 
without cost or disadvantage of any kind, compel the individual 
to do that which was expedient, he could not reasonably do 
other than ask that the government act in the matter and cor- 
rect the evil. If, for example, he were convinced that on the 
whole the cigarette or jazz music did slightly more harm than 
good, or that, if it could be eliminated without cost or disad- 
vantage in any form, more good than harm would result from 
its loss, and if he believed that the government could eliminate 
it without harm or disadvantage of any kind, he would, as a 
good economist, demand that the government act in the matter 
and eliminate it. But if he believes that the government is not 
able to do any such thing without a great deal of cost, in the 
form of money, man power, irritation, or something else, it is 
an entirely different story. In the case of a vice that is not very 
destructive it might do more harm to try to repress it than to 
let it flourish ; only in the case of a very destructive vice would 
it do more harm to allow it to flourish than the government 
would be likely to do in trying to repress it. 

Politics no better than business. With such a view of gov- 
ernment one may believe in a laissez-faire policy without mak- 
ing any of the assumptions mentioned by Clay. It would be 
quite as near the truth to paraphrase the charges against the 
laissez-faire theorists by charging the advocates of government 
interference and regulation with assuming (i) that voters are 
dominated by rational self-interest or that individuals in their 
political relations can be relied on to vote for their own interest, 
and that their voting will be rational and informed; (2) that 
political competition, or politics, will result in the election of 
the socially fittest; (3) that public office and political power 
will ordinarily be the result of social service, or that as a rule 
public office and political power will be acquired only by serv- 
ice ; and (4) that poHtical values (that is, power to get votes) 



THE LIMITS OF STATE INTERFERENCE 743 

and social values are identical, or ''that political values corre- 
spond roughly with social values and are an adequate indicator 
of need for production to follow." 

At the end of the chapter on Protectionism it was shown that 
men, if left to themselves to buy and sell what they like, will 
frequently develop market valuations or prices which are not 
true indexes of social utility ; but doubt was expressed as to 
whether politics was capable of correcting these evils except 
in extreme cases. A man may have a rather poor opinion of 
the average individual in business and his ability to pursue his 
own interest on the market, but if he has a still poorer opinion 
of the same average individual in politics and his ability to 
pursue either his own or the public's interest at the polls, he 
will very consistently prefer not to have average citizens in 
politics interfering too much with average citizens in business. 
Again, he might be exceedingly pessimistic as to the results of 
economic competition, believing that rascality and predation 
frequently succeed as against honesty and production ; but if 
he is still more pessimistic as to the results of political competi- 
tion, believing that rascality and predation succeed even more 
frequently in politics than in business, he will consistently 
regard unregulated economic competition as less evil than 
wholesale government interference. Again, he may believe that 
property and wealth frequently accrue to men who have not 
earned them by any corresponding social service; but if he 
believes that government offices and political power and influ- 
ence still more frequently go to men who have not earned them 
by any corresponding social service, he may consistently prefer 
the results of economic competition to those of control by 
politics or by those who manage to get elected to office by 
political methods. Finally, he may see very clearly that market 
values and social values are frequently far apart ; that many 
things of little real worth sell on the market at a high price and 
others of great worth at a low price; but if he sees equally 
clearly that ideas of no social value frequently have high value 
as vote-getters, and others of high social value have no value 



744 PRINCIPLES OF NATIONAL ECONOMY 

at all as vote-getters, he may very consistently consider market 
values as a less unsafe guide to production than political values. 

The question is not how much confidence one has in the 
wisdom or disinterestedness of the people but whether he thinks 
the people show greater average wisdom in their economic than 
in their political activities, or vice versa. The believer in a 
laissez-faire policy may believe merely that men generally show 
more wisdom or less unwisdom in their business dealings or 
economic activities than in their political activities, whereas the 
believer in a general policy of regulation must believe that men 
show more wisdom or less unwisdom in their political than in 
their business activities. 

The case of free speech. The question of freedom of speech 
will serve as an example. It would be absurd to charge the 
advocate of freedom of speech with assuming that everyone 
who talks will talk intelligently or that his talk will be "rational 
and informed"; that competition in speech (that is, discussion) 
will always or generally result in the survival of the fittest 
ideas; or that talk that results in the greatest profit to the 
talker will ordinarily be the most useful to the community ; etc. 
He may believe none of these things : he may be convinced that 
a great deal of foolishness results from freedom of speech, that 
infinite harm is done by some talkers who mislead the people. 
I doubt whether he could seriously contend that false or mislead- 
ing talk or teaching does less harm than predatory business, and 
yet he may be a firm believer in free speech merely because he 
thinks that attempts by the government to interfere with it 
result in even greater harm. The argument may not be con- 
vincing to him when he is told that the government represents 
the people and that the people will vote for those officers who 
suppress certain talkers and against those officers who let them 
talk. He may not believe that the people voted wisely when 
they elected these official censors or refused to elect officers who 
would not act as censors. He may believe that the result of 
the people's votes in such cases will be worse than any that 



THE LIMITS OF STATE INTERFERENCE 745 

would be likely to follow the policy of letting the talkers alone ; 
that is, a laissez-jaire policy with respect to speech. 

No kind of freedom more sacred than any other. Possibly 
someone may resent the idea of comparing freedom of speech 
with freedom of business. Freedom of speech and of the press 
are sometimes spoken of as though they were in a class by 
themselves and not to be compared with other forms of free- 
dom, least of all with freedom of enterprise or freedom to do 
business. I know of no sound reason for making such a dis- 
tinction, unless the personal preference of the individual who 
is making the distinction be considered a sound reason. As a 
matter of fact, freedom to most of us means nothing more than 
freedom to do what we want to do. It takes an unusual person 
to prize freedom as an abstract principle or to grow enthusiastic 
over the freedom to do something that he had never cared to 
do or thought of doing. 

Since different people want to do such different things, it 
follows that they develop very different ideas as to what free- 
dom means. A great many Americans have been energetic and 
enterprising in business, — have loved to do things on their own 
initiative. Freedom to them has consequently meant freedom 
of enterprise. Others have loved to talk, to write, or to teach. 
These activities rather than business enterprise are their favor- 
ite modes of self-expression ; consequently freedom does not 
mean much to them unless it includes freedom of speech and of 
the press. The enterprisers have not always been as zealous for 
freedom of speech and of the press as for freedom of enterprise, 
and the talkers and writers are often willing to sacrifice freedom 
of enterprise while contending vigorously for freedom of speech. 
Others care very little for freedom of speech and still less for 
freedom of enterprise. All they want is a weekly pay envelope. 
They would as soon get their pay envelope from a government 
as from a private enterprise and from one kind of government 
as from another. They are for any government that promises 
them a fat envelope with freedom to spend it as they please. 



746 PRINCIPLES OF NATIONAL ECONOMY 

Freedom of self-indulgence. It is interesting and instruc- 
tive to note how in certain foreign countries the claim is made 
that there is less freedom in America than there. Productive 
enterprises are much freer here than there; men are freer to 
seek their fortune in all sorts of useful employment here than 
there ; there is much freer discussion of public questions, both 
in open forums and the public press; but here there is less 
freedom to indulge their animal appetites than they find at 
home. This is the only respect in which they are freer than we. 
Since we do not prize this so very greatly we are not conscious 
of any serious restrictions upon our freedom, but they doubtless 
feel much freer in their own lands than they would if they 
came here. 

This tendency to prize freedom to do merely what we like to 
do, rather than freedom for everybody to do anything that is 
useful and to seek the legitimate rewards of his usefulness, 
seems to the laissez-faire theorist to explain why freedom makes 
such slow progress. To him it seems that we should clarify our 
thinking if we were to realize that no one kind of freedom is 
any more sacred than any other and that no kind is an end in 
itself. We should still further clarify our thinking and ration- 
alize our policy, from his point of view, if we were to realize 
that each and every kind must meet the test of social utility, 
that no one is entitled to freedom to do anything that is con- 
trary to the public good, that freedom to produce, freedom to 
consume, and freedom to speak and write are all alike and to 
an equal extent subject to that limitation. It seems to him 
that when we once clearly realize this, and when all of us begin 
working consistently for freedom in its larger sense rather than 
in its narrow, fragmentary, and personal sense, there will be a 
new birth of freedom. 

This does not imply, however, that men, if left to themselves, 
will always do what is right or socially useful. They will do 
many things that are socially useless or even harmful. But to 
say that a thing is harmful or that it ought not to be done is 
not the same as saying that the government should repress it. 



THE LIMITS OF STATE INTERFERENCE 747 

Government repression requires the use of force and generally 
a good deal of prying and espionage in order to find evidence. 
We may try to rob these things of their repulsiveness and 
make them as attractive as possible by introducing a kind of 
ceremonialism into judicial procedure, but to the laissez-faire 
theorist they are still repulsive and are to be used only where 
the thing they are trying to prevent is more repulsive than they. 
In many cases a socially harmful thing -really does less harm if 
let alone than the government would do if it tried to repress it. 
Anyone who is convinced of this may very consistently favor 
a laissez-faire policy with respect to the thing in question. In 
short, the only necessary assumption of a laissez-faire policy is 
that government regulation or repression is costly. With this 
assumption agreed upon, the question then becomes. Are the re- 
sults of repression or regulation worth as much as they cost? 
A more accurate and detailed statement of the question would 
be, Are the evils to be repressed greater than those that accom- 
pany the work of repression, and are the evils to be removed by 
regulation greater than those that accompany the work of regu- 
lation ? When it is once understood that this is the question, 
the method of procedure must be to consider, appraise, and 
compare the evils on both sides. 

Difficulty of measuring cost. Unfortunately there is no in- 
strument of precision by means of which we can weigh or meas- 
ure these evils. The appraisal must be largely a matter of 
judgment, and judgment must be largely a matter of tempera- 
ment, sometimes of prejudice. Those who temperamentally or 
otherwise care greatly for freedom of consumption and see no 
serious evils connected with freedom to consume whatever one 
likes may decide against sumptuary regulations on what to them 
are purely utilitarian grounds. Others who see, or think they see, 
that certain forms of consumption are doing great harm may 
with equal consistency decide in favor of what seems the lesser 
evil of regulation or repression of those specific forms of con- 
sumption. Again, those who prize greatly freedom to talk or 
who think that it does not matter much if people are misled by 



748 PRINCIPLES OF NATIONAL ECONOMY 

bad talk or false teaching will very likely decide either against 
any regulation or to limit the work of regulation to the most 
extreme cases, where, for example, the very life of the nation 
may be at stake. Others who do not see that freedom to talk 
is so very important or who believe that great harm results from 
bad teaching may be a little more liberal in their use of political 
power in the repression or regulation of speech. Finally, they 
who do not care greatly for material wealth, or who do not see 
that any great harm is done if a few men here and there do get 
more than their just share, may decide that the evils of unregu- 
lated business are not great enough to justify a large amount 
of interference ; whereas those who care greatly about such 
things, who are deeply resentful if someone gets more than his 
share or, if not resentful on their own account, simply feel that 
it does great harm if a man here and there is getting too much, 
will naturally go in for more regulation. 

Partly a matter of temperament. On the other side of the 
case something will depend also upon one's temperamental at- 
titude toward government and its agents. One who does not 
feel that it is a very serious thing to have police officers and 
other agents of the government prying around, gathering evi- 
dence regarding possible violation of sumptuary regulations, 
espionage laws, factory acts, etc., is likely to be very com- 
placent toward rather minute regulations. Others, who feel 
differently toward the government and its agents, are likely 
to feel more or less impatient toward any except the most 
necessary regulations. 

These temperamental and emotional differences will always 
make it difficult for people to agree on the precise limits of 
government interference, but it is worth something to have the 
problem stated in terms of comparative cost and divested of 
unnecessary assumptions. Under the doctrine of comparative 
cost, of course, there is room for much variation. The evil 
to be repressed may, in some cases, be so great as to call for 
repression in spite of the clumsiness, inefficiency, or even the 
corruption of government. That is no more extreme than say- 



THE LIMITS OF STATE INTERFERENCE 749 

ing that a material product may be so valuable as to justify its 
production, even though the instruments of production may be 
very poor and the actual cost may be four times the necessary 
cost. A product of considerable value, however, may not be 
worth its cost when the technique of production has not been 
developed, and may be more than worth its cost after that 
technique has been developed. Similarly, when the technique 
of control, regulation, and repression has been highly developed 
we may find it advantageous to regulate consumption, speech, 
and production vastly more than is now expedient. 



CHAPTER LVI 
CONSTRUCTIVE LIBERALISM 

What the liberalist believes." A liberalist in economics is one 
who believes in the freedom of the individual rather than in 
compulsion, either by the mass or by a despot. He relies mainly 
but not exclusively upon individual initiative. He believes that 
individuals will, without compulsion and under freedom of con- 
tract, do whatever is necessary to provide for the needs of the 
community. He believes that it is not necessary continually 
to impose upon the individual the authority either of a benevo- 
lent despot or of a well-meaning majority. In somewhat ex- 
treme cases, such as can be covered by the criminal law, laws 
for the enforcem.ent of contracts and other obligations, and 
laws for the standardization of various aspects of business, 
compulsion is necessary and helpful. He believes that the inter- 
ests of the public are expressed quite as accurately on the mar- 
ket and through the price lists as through the ballot box and the 
statute books. He believes even that poverty and most of the 
social ills can be eliminated under the system of voluntary 
agreement — freedom to accumulate, to own, and to operate 
private property — and without subjecting individuals to tlie 
necessity of becoming government employees. 

Freedom versus compulsion. There are only two ways of 
getting men to do what is necessary for their own maintenance 
and that of the public : one is to induce them by the offer of a 
reward, either of a material or of an immaterial kind'; the other 
is to compel them by authority. For example^ an arm.y can be 
recruited and men led to fight for their country either by the 
volunteer system or by conscription. The one is the method of 
freedom; the other is compulsory so far as the individual is 
concerned, whether the government be despotic or democratic. 

750 



CONSTRUCTIVE LIBERALISM 751 

In the case of despotism a despot exercises compulsion over the 
individual ; in the case of a democracy it is the mass which 
exercises the compulsion. On general grounds popular govern- 
ment is very much better than despotism, but so far as the 
conscripted individual is concerned he has no more choice as to 
whether he will fight or not in one case than in the other. 

Industries may likewise be recruited under the volunteer sys- 
tem or by conscription. Men may be induced to work on the 
farms and in the factories and mines by the offer of wages, 
profits, etc. or they may be directed by authority to do so. 

If no one were allowed to accumulate capital or to own a 
farm or a factory or a mine we should have much less freedom 
to choose our own occupations and to direct ourselves than we 
have under a system of free private enterprise and voluntary 
agreement. Even in an army the higher officers are not con- 
scripted, though there is a story of a man who went into hiding, 
there to remain until the government should begin to draft 
captains. Under a regime of complete government ownership 
and operation men would have to be chosen by authority for the 
higher as well as for the lower positions in the industrial system. 

Opposed to socialism. That there would be less freedom 
under universal government ownership than under private own- 
ership will be clear to anyone who will stop dreaming long 
enough to think about it. No one could begin farming on his 
own initiative under that system, but would have to be placed 
in charge of a farm or told to work under a boss, according as 
those in authority should decide. Under a liberalistic system 
anyone who can handle a farm successfully can become a 
farm manager and ultimately a farm-owner, as thousands have 
already done. By serving an apprenticeship as a farm hand 
under a free contract with another free man, if the farm hand 
is a success he can always, after a few years of experience, be- 
come a share renter. Again, by making a contract with another 
free man, if he can make a success of this he can in a few more 
years become a cash renter. Again, if he is successful he can 
become a mortgaged owner and, finally, an unmortgaged owner. 



752 PRINCIPLES OF NATIONAL ECONOMY 

Every stage of this advancement is conditioned upon his 
making a success of the next lower stage. If he can, according 
to the philosophy of liberalism it is economical of the human 
resources, as well as of the farms, that he should be advanced 
until he finds his level. If he cannot make a success in any one 
of these stages it is a sign that he has reached or passed his level, 
that he has risen as far as, or farther than, it is economical that 
he should rise. It would be a waste of both human and material 
resources to advance him farther. If, for example, he can suc- 
ceed as a farm manager it would be wasting a good manager to 
leave him in the position of a farm hand. In the interests of 
the community he should advance. But if he would make a 
poor manager it would be wasting other labor, as well as mate- 
rial equipment, to have them placed under his management. 
Under the system of free contract each man tends to find the 
place in the industrial system in which he can best fit. This is 
the method of trial and error. Each individual tries himself 
out and does not have to wait for the consent of someone else. 
Under the system of universal government operation the 
would-be farmer would have no better chance to test himself, 
or to advance on his own initiative, than he now has in the 
army or in the civil service. 

The liberalist believes that, in general, the volunteer plan is 
better than the compulsory one. There are, of course, occa- 
sions when compulsion becomes necessary. These are usually 
occasions of acute and instant necessity, when there is not time 
for the market to adjust itself and to organize a volunteer 
system. 

In time of war compulsion takes the place of freedom. So- 
cialists are in the habit of saying that in time of war nations 
turn to socialism. It is true that in time of war compulsion is 
generally, or at least to a considerable degree, substituted for 
freedom ; but the whole business of war is compulsion. Our 
dealing with foreign enemies is necessarily on a compulsory 
rather than on a voluntary and contractual basis, and the whole 
organization of society may have to be changed from freedom to 



CONSTRUCTIVE LIBERALISM 753 

compulsion in order to carry on the compulsory business of war. 

There are a multitude of minor forms of compulsion besides 
war itself. Taxation is a compulsory payment of money to 
the government. Conscription is compulsory military service. 
Forced loans are compulsory in a high degree. The censorship 
of the press is merely compulsory regulation of the business of 
selling talk for private profit. It may be necessary, in order 
to prosecute a war successfully, to resort to compulsion in re- 
cruiting munition factories and even farms. Rationing the 
population in time of food scarcity may be necessary. 

In a regime of universal compulsion some must necessarily be 
treated better than others. Even though conscription be carried 
out without personal favor, the result works to the disadvan- 
tage of those drawn by conscription as compared with those not 
drawn. Those on whom the lot falls act as shock absorbers 
for the rest of the community. There is nothing particularly 
democratic about this^ though it may be the best possible way 
of meeting a national crisis. Under such conditions, when the 
life of a nation is at stake, it does not stop for the niceties of 
social justice. Necessity knows no law. It is probable, how- 
ever, that as a result of several years of this compulsion there 
will be so much dissatisfaction and sense of unfairness as to 
provoke a strong reaction against compulsion and in favor of 
the volunteer system, not only in the work of fighting but in 
business and industrial pursuits as well. We may consider 
ourselves fortunate if this reaction does not carry us too far in 
the direction of license and impatience with all restraint. 

Dangers of freedom. Freedom of trade — freedom to buy 
and sell, to offer and accept rewards — is a part of the program 
of liberalism. There are, however, some very serious results 
which accompany freedom of bargaining. We saw in Chapter L 
that the advantage in bargaining is always on the side of 
those who are trying to sell something which is undersupplied 
or of those who are trying to buy something which is oversup- 
plied. Conversely, the disadvantage is, of course, on the side 
of those trying to sell something which is oversupplied and of 



754 PRINCIPLES OF NATIONAL ECONOMY 

those trying to buy something which is undersupplied. When 
there is a long-continued oversupply of certain commodities or 
of certain kinds of labor, those who are under the disadvan- 
tage of trying to sell them feel, naturally enough, that the ad- 
vantages of free contract are not so very great, since they are 
playing a losing game. They are frequently willing to take 
their chances under some form of compulsion, feeling that they 
could not be much worse off than they are under the system of 
free contract. 

The situation of those trying to sell something that is over- 
supplied, especially if it happens to be labor, is summarized in 
the statement that ^Hiberty is frequently the liberty to starve." 
It must be confessed that liberty is dangerous, even though it is 
very precious. Severe conditions are imposed on free men. 
Liberty to be on the street may mean liberty to get run over by 
an automobile. Liberty to go swimming may mean liberty to 
drown. Liberty to sail the seas may mean liberty to get ship- 
wrecked. Children who are restrained in their liberty and are 
forbidden to be on the street are in less danger of being run 
over, and those who are prevented from going in swimming are 
in less danger of being drowned. Liberty is a terrible thing, 
but at the same time it is, for grown men, beyond price. Liberty 
to buy and sell may mean liberty to become bankrupt. The in- 
dividual who has a guardian to forbid him to do any bargaining 
whatsoever may be saved from bankruptcy. 

Advantages and disadvantages of freedom of contract. We 
saw in Chapter L that when farm products are oversupplied, 
as they were in the early nineties of the last century, the 
farmer is at a disadvantage in bargaining. When he was com- 
pelled to take low prices for his products, in many cases he was 
impoverished. There are only two possible ways out of such 
a difficulty : the first way is to restore the equilibrium between 
the demand and the supply, so that the prices of products shall 
rise to a remunerative level and the farmer be enabled to bar- 
gain advantageously ; the second is for the government to exer- 
cise its power of compulsion in favor of the farmer and against 



CONSTRUCTIVE LIBERALISM 755 

those who have the advantage on the market. At other times, 
as during the World War, the reverse of these conditions is 
found to exist. The consumer is the one who is at a disadvan- 
tage, since he is trying to buy undersupplied goods. Again, 
there are two ways out: first, to increase the products and 
restore the equilibrium between the demand and the supply; 
second, for the government to resort to some sort of compul- 
sion in favor of the consumer and against the farmer or the 
dealer. The liberalist is one who prefers to restore the equilib- 
rium and then allow the free bargaining process to go on. 

In much the same way there has been what seems like a 
chronic oversupply of the lower grades of unskilled labor. This 
has made it difficult for the unskilled laborers to secure remu- 
nerative wages; that is, wages high enough to support their 
families in comfort. At the time of the World War there 
appeared to be a scarcity, or at least there was no longer such 
an oversupply of labor as formerly. Immigration from Europe 
had almost ceased, and at the same time the country was trying 
to expand various lines of production. 

In ordinary times, however, for some hundreds of years back, 
the unskilled laborer has been at a disadvantage. A great many 
sympathetic people have assumed that there was something 
inherent in the nature of labor that put the laborer at a disad- 
vantage, and something inherent in the nature of capital that 
put the capitalist at an advantage in the bargaining process. 
This is not true, although, as we have seen above, conditions 
have generally been more favorable for the capitalist than for 
the unskilled laborer. But whenever and wherever unskilled 
labor has been hard to find, the advantage has been quite as 
much on the side of the unskilled laborer and the disadvantage 
quite as much on the side of the employer. Whenever it has 
been possible for an employer to hang out his shingle saying 
''Men Wanted*" and have ten men apply for each position, the 
conditions have been favorable for the employer and unfavor- 
able for the laborer. The fact that there are more men apply- 
ing for jobs than there are jobs to be had is a sure indication 



7S6 PRINCIPLES OF NATIONAL ECONOMY 

of an oversupply of labor. The case is parallel to that which 
would exist if a buyer of wheat could hang out a sign "Wheat 
Wanted" and have many times more wheat offered than he 
could buy. That would be a sure indication of the oversupply 
of wheat. On the other hand, if a farmer should put up a sign 
which read ''Wheat for Sale" and find that many more buyers 
than he could supply were coming to purchase wheat^ that fact 
would indicate an undersupply of wheat. Similarly, if a la- 
borer, by putting out a sign "Job Wanted" should have sev- 
eral employers coming after him, this fact would indicate an 
undersupply of labor. 

Making the advantages even on the two sides. The policy of 
the constructive liberalist is indicated by these observations. 
It is his opinion that conditions can be created under which the 
average employer will find it as hard to get a man to work for 
him at liberal wages as the man will find it to get an employer 
to hire him at those wages. When that is accomplished the 
advantages in bargaining will be about even. Labor will no 
longer be under a handicap in the bargaining process. Laborers 
will no longer feel the need of some compulsory restriction 
upon bargaining, but will feel quite able to take care of 
themselves without help from the government or any other 
compulsory agency. 

A program looking in this direction may take a little longer 
to work out, but from the point of view of the constructive 
liberalist the results once achieved are vastly preferable to any 
achieved under a compulsory system. There is an old story 
about a wagoner one of whose wagon wheels got into a deep 
rut. Instead of trying to extricate it he sat down by the 
side of the road and called upon Hercules to aid him. The 
story goes that Hercules replied that if the man would put his 
shoulder to the wheel he could get out of the difficulty without 
calling on outside help. This^ according to the#liberalist, rep- 
resents a general tendency in human nature. The government 
is our Hercules, and whenever we get into difficulties we are 
in the habit of sitting down and crying vociferously for the 



CONSTRUCTIVE LIBERALISM 757 

government to come and do something. Even though we have 
only the vaguest ideas as to what the government could do, we 
still insist that it do something or other. To be sure, there are 
some things which only the government can do. No other 
agency than the government can be intrusted with any kind of 
compulsion ; and if compulsion is necessary, of course we must 
then call upon the government. To paraphrase an old remark, 
the individual's extremity is the government's opportunity. 

"Doing something" for people. Beneficence is, of course, a 
characteristic of good government ; but many of us, according 
to the liberalist, have never reached the point where we can 
understand that a '^beneficent letting alone" is sometimes the 
most beneficent thing the government can give us. There are 
many people who feel that when they are ill the doctor must 
'Mo something." They do not realize that sometimes the most 
beneficent thing the doctor can do is to do nothing. A doctor 
whose desire is to please his patients may feel under some com- 
pulsion to do something for them, even if it is nothing more 
than to give them bread pills. From the standpoint of the 
liberalist much of. our so-called social legislation consists of 
bread pills. 

Sometimes, however, it is really necessary that the doctor 
should do something. The doctor whose skill consists in his 
ability to cure sickness rather than to please patients will have 
enough to do, provided the people know enough to appreciate 
him. The same may be said of a government. There are a few 
really vital things that a government may do. If it succeeds in 
doing these few things well, it will then be unnecessary to do 
the thousand and one trivial things that it is asked to do. 

Restriction of immigration. So far as this country is con- 
cerned, probably the most far-reaching and constructive piece of 
legislation in the last generation has been the restriction of im- 
migration. This is one of the few acts of the government which 
go directly to the root of the difficulty of low wages and poverty. 
It is an act which definitely aims at reducing the oversupply of 
unskilled labor. It is true that it does not go far in this direc- 



758 PRINCIPLES OF NATIONAL ECONOMY 

tion, but at least it indicates to the public that the government 
has recognized the source of the difficulty and is no longer pro- 
ceeding on general guesswork in an attempt to overcome it. 
If it will go a little farther in the same direction it will make 
unskilled labor so scarce and hard to find that the unskilled 
laborer will no longer be at a disadvantage, but can bargain on 
even terms with employers and secure living wages for himself 
without help from anybody. 

Wherever any particular class of labor is, for a considerable 
period, scarce and hard to find, there the conditions of labor are 
good for that class, and it needs no social legislation for its 
protection ; but wherever any particular class of labor is abun- 
dant and easy to find, there the conditions of that class of labor 
are bad except where mitigated by the kindliness of individual 
employers or by various kinds of social legislation, most of 
which are ineffective. 

So long as labor is oversupplied and laborers are unable to 
get good jobs the term ^^wage slavery," while inaccurate and 
intended to mislead, will continue to convey a meaning to the 
laboring man and will be an effective means of misleading him. 
Where labor is scarce and hard to find no one can use that 
term with a straight face. So long as the former conditions 
prevail, there will be a widespread feeling — and this feeling 
will be justified — that the laborer is in a helpless situation, 
so far as economic laws are concerned, and that his only hope 
is in numbers and brute strength. When this feeling is wide- 
spread, laboring men will be excused, and public opinion may 
justify them, in the use of violence. There will be no effective 
public opinion to support the state in its efforts to preserve law 
and order. When there is some approach to the latter condi- 
tions, there will be an easy recognition of the fact that the 
laborers are not in a helpless condition and that they do not 
need to rely on numbers and brute strength, and public opin- 
ion will then support the state effectively and promptly in its 
maintenance of law and order. 



CONSTRUCTIVE LIBERALISM 759 

While it may not be possible or desirable to reach such 
extreme scarcity of laborers and abundance of employers as 
described under the last-named condition, it is both possible 
and desirable to make some progress toward that condition and 
away from the first-named condition. We can train a few more 
men to become employers — creators of business enterprises — 
and thus increase somewhat the number of jobs for laboring 
men. This will do our present laboring population little good if 
the new jobs are promptly filled by immigrants. There must 
also be a restriction of immigration. 

Results of importation of capitalists and employers. If immi- 
grants entered the class of employers in the same proportion as do 
the native born they would not materially disturb the balance. 
If they generally entered the ranks of employers rather than 
employees they would disturb the balance to the advantage 
of laborers and to the disadvantage of employers. But they 
enter the laboring class almost exclusively and the class of 
unskilled laborers predominantly. If they were excluded 
(which is not here proposed) our free education and liberal 
institutions would encourage those now here to rise rapidly out 
of the class of unskilled laborers into the better-paid occupa- 
tions, — better paid because men are scarce who are fitted to 
fill them. This would soon make unskilled labor, and ulti- 
mately all poorly paid labor, so scarce and hard to find as to 
put all laborers in a strong position economically and make it 
unnecessary for them to resort to numbers and brute strength. 
Moreover, employers would have to offer satisfactory induce- 
ments to persuade laborers to work for them, and very little 
social legislation for the alleged protection of the laborers 
would then be necessary. 

Selecting immigrants. Better than exclusion would be a plan 
of restriction which would select those who were capable of 
entering the well-paid occupations and exclude those who would 
crowd into occupations where wages are already too low. The 
best way to do this would be to reverse our present contract- 



76o PRINCIPLES OF NATIONAL ECONOMY 

labor law and admit only such immigrants as could present 
contracts, signed by responsible employers, guaranteeing em- 
ployment at five dollars a day for at least a year. (It is not 
necessary that the wage should be exactly five dollars. That 
figure is named because it is about the minimum on which a 
family can be supported in comfort and decency in any large 
city in this country. It is essential that there be some minimum 
wage attached to these contracts.) This would admit all the 
laborers who were really needed. No employer can say, with 
a straight face, that he needs men so very badly unless he is 
willing to pay them as much as five dollars a day. At the same 
time it would prevent the coming of hordes of cheap laborers 
whose influence is to depress the wages of unskilled labor. It 
would make the lower grades of labor so scarce as to even- 
tually make five dollars a day the actual minimum wage with- 
out the difficulty of enforcing a minimum-wage law. This would 
automatically take care, also, of the distribution of our immi- 
grants, because they would go only to those places where they 
were badly needed. This would be very much better than any 
immigration commission could distribute them, besides saving 
for useful work the man-power that would be wasted upon 
the commission. 

The literacy test as a means of selecting immigrants is vastly 
better than no test at all. This is said with a full recognition of 
the fact that literacy is not an invariable test of character. 
Neither is it an invariable test of fitness for the civil service nor 
for entrance to college. It is believed, however, that if all 
literate immigrants are arranged in one group and all illiterates 
in another, the average of the literates would be above that of 
the illiterates. Excluding illiterates would therefore improve 
the average quality of our immigrants. 

Again, the illiterates go predominantly into the unskilled 
trades where wages are low. The exclusion of illiterates there- 
fore tends to make unskilled labor scarce, while the admission 
of literates would permit us to get all the skilled labor we need ; 



CONSTRUCTIVE LIBER.\LISM 761 

that is, to increase our supply of any kind of labor which can 
in any sense be said to be scarce. 

It will be observed that nothing has been said in the above 
statement about race, religion, eugenics, or anything of the 
kind. The reasons given in favor of the restriction of immi- 
gration are purely economic. They relate wholly to the prob- 
lem of improving the conditions of the lower grades of labor. 
The time is probably coming when anyone's protestations of 
interest in the cause of labor or of social welfare will be laughed 
out of court unless he is willing to do the one thing which 
will really help labor ; that is, make it scarce and hard to 
find, or jobs abundant and easy to find, which comes to the 
same thing. 

Restriction essential. Whatever immigration policy is adopted 
we must not lose sight of the fact that the essential thing is to 
restrict. Unless the number of unskilled laborers is materially 
reduced, the immigration policy will do nothing for labor. If 
the number of unskilled laborers is materially reduced, it will 
tend to make unskilled labor scarce and hard to find. Our 
democratic institutions, under which every human being is 
encouraged to rise in the economic scale, and our system of 
popular education, which makes it easy for the rising genera- 
tion to avoid the unskilled and poorly paid and to enter the 
skilled and highly paid occupations, will combine to thin out the 
unskilled laborers. These democratic institutions, however, 
will not relieve the oversupply of unskilled labor if we continue 
to import it in unlimited quantities. Any kind of restriction, 
therefore, is better than no restriction. In addition to the 
literacy test, any other test which will actually reduce the num- 
bers imported and permit us to select the more desirable appli- 
cants is a good proposal, though some maybe better than others. 

Highly productive industries can flourish on dear labor. It 
may be objected, however, that without cheap labor some of 
our industries could not flourish. That may be true. We have 
to consider, however, whether an industry is worth preserving 



762 PRINCIPLES OF NATIONAL ECONOMY 

that is in itself so unproductive or is of such low productivity 
as to require cheap labor for its survival. The author's opinion 
is that the country would be better off without such industries. 
We should still have industries that were productive enough to 
stand high wages. It would be a better country if it were sup- 
ported exclusively by such industries than it will be if the 
ground is cumbered by such barren fig trees as industries that 
can flourish only on cheap labor. 

Some general shifting about and readjustment would un- 
doubtedly be necessary. Some indispensable operations now 
performed by cheap labor would still have to be performed, 
but if the work is indispensable we should simply pay high 
wages to get it done. Most of such operations, however, would 
eventually be done by machinery. So long as it is cheaper to 
have them done by hand than by machinery they will be done 
by hand. When it becomes more expensive to have them done 
by hand than by machinery they will be done by machinery. 
They who fear that certain indispensable operations cannot 
be done at all if we do not have cheap labor apparently have 
very little faith in their own inventiveness or in that of their 
fellow countrymen. 

The author is fully aware that it is money in the pockets of 
the business and professional classes to have immigrant laborers 
come in large numbers. Numerous immigrant laborers mean 
an abundant supply of cheap labor. An abundant supply of 
cheap labor means reduced cost of production. Reduced cost 
of production means either increased profits or else lower prices. 
If it means increased profits, that means larger incomes for the 
employers. If it means reduced prices, that m.eans that the 
incomes of those who do not have to compete with the immi- 
grants will purchase more, but it also means that the incomes 
of those who do have to compete with the immigrants will be 
reduced by that competition and will purchase less. In short, 
those who do not compete with the immigrants get a larger 
share and those who do have to compete with them will get 
a smaller share of the total products of all our industries when 



CONSTRUCTIVE LIBERALISM 763 

we import vast numbers of cheap laborers. Immigration of 
laborers rather than of employers is, in other words, a means 
of increasing the inequality between laborers and employers. 

Dangers of an oversupply of cheap labor. Even from the 
point of view of the employing classes it is a penny-wise and 
pound-foolish policy to favor unrestricted immigration. When 
laborers are many they are, it is true, in a weak position in bar- 
gaining. As pointed out in Chapter L, on the market num- 
bers count against them. But, conversely, they are in a strong 
position in voting and fighting. Here numbers count in their 
favor. The employing class is hereby warned to beware of the 
day when 51 per cent of our voting and fighting population is 
in the position of poorly paid wageworkers, who, because of 
their low wages, have very little chance of ever rising out of 
that class. When that happens they will take charge of your 
industries by force. It is quite true, of course, that they would 
injure themselves in so doing, but men frequently do things 
through class hatred that injure them. Unrestricted immigra- 
tion tends to increase the number of such poorly paid wage- 
workers and might easily carry it beyond the danger point. 

A low standard' of living and a high birth rate. But immi- 
gration from Europe and Asia is not the only source of over- 
supply of unskilled labor. The inordinately high birth rate 
among the ignorant and unskilled is another large source of 
cheap labor. Nothing, apparently, but a rise in the standard of 
living will reduce the volume of this stream. A rise in the 
standard of living means an increase in the number of things 
which the average man or woman thinks necessary to the sup- 
port of the family. The more things they feel they must have 
before they can marry and support a family, the longer they 
will postpone marriage. The longer they put off marrying, the 
smaller the number of children there will be in the family, 
partly, at least, because the childbearing period of the wife is 
reduced. If the age of marriage is raised on the average from 
eighteen to twenty-three, there are five less years during which 
the wife may bear children. 



764 PRINCIPLES OF NATIONAL ECONOMY 

Families too small among the educated classes. The restric- 
tion of immigration among the ignorant and unskilled, of 
course, has nothing to do with the restriction of immigration 
among the educated and skilled. The latter are as free to come 
as when immigration was unrestricted. Similarly^ a rise in the 
standard of living among the ignorant and unskilled has noth- 
ing to do with the marriage and the birth rate among the edu- 
cated and skilled. Among the latter classes the reform ought 
to proceed in quite the opposite direction. There is no doubt 
that among these people marriages are postponed too long and 
the average families are too small. 

Increasing the supply of employers. The decrease in the 
number of people born with the heredity and prospective train- 
ing which fit them for skilled positions and for positions in the 
ranks of the employing class tends to reduce the demand for 
unskilled labor. Hitherto unskilled laborers have suffered from 
two causes : the fact that there have been too many unskilled 
laborers and the fact that there have been too few employers. 
It is as though in the badly balanced ration of an individual or 
an animal the too abundant ingredient (say, starch) were to be 
increased more and more and the too scarce ingredient (say, 
protein) were to be decreased more and more. The combined 
result of increasing the one and decreasing the other would 
produce a more and more unbalanced ration, to the detriment 
of the man or the animal. The continuous increases in the 
ranks of the unskilled laborer through immigration and the high 
birth rate, and the decrease in the highly skilled and managerial 
labor through the postponement of marriage and various other 
causes, have produced a progressively unbalanced population, 
tending to make unskilled labor very cheap and highly skilled 
and managerial talent very dear. 

Fortunately, the effect of this combination of processes has 
been offset, at least partially, by our system of popular educa- 
tion. Such a system of universal and popular education has 
the effect of redistributing talent, of taking young people who 
would otherwise have remained in the ranks of the unskilled 



CONSTRUCTIVE LIBERALISM 765 

and training them for the ranks of the skilled, the managerial, 
and the entrepreneur class. This tends to reduce the supply of 
ignorant laborers and increase the supply of educated workers. 
If the system of popular education continues to improve, if 
greater and greater restrictions are placed upon the importation 
of unskilled labor and a higher standard of living is acquired by 
our own unskilled laborers, the combined results of these three 
changes will tend to make unskilled labor scarce and hard to 
find and to make jobs abundant and easy to find, thus giving the 
unskilled laborer the advantage not only of retaining his liberty 
of contract but of prospering under it. If we carry out our 
educational policy to its logical limit and train not only skilled 
laborers but also managers and employers, and at the same time 
create a more rational standard of living and better moral con- 
ditions among these classes, the combined results of these two 
policies (that is, training men for the high positions and en- 
couraging larger families among them) will so increase the 
numbers of the managerial class as to take away their present 
advantage in the bargaining process. By following this general 
process throughout all ranks of society we may expect in a 
short time so to even up the advantages of bargaining as to give 
us something approximating equality without substituting com- 
pulsion for freedom. 

Thrift and the laborer. The encouragement of thrift will 
tend in the same direction and will accelerate the process of 
putting unskilled labor in a position to prosper under freedom. 
It is through thrift that capital accumulates. When capital be- 
comes so abundant that the average owner of capital has great 
difficulty in finding an opportunity to use it, he will have to be 
content with a smaller share in the products of industry. 

The encouragement of productive enterprise, the frank ac- 
knowledgment of our obligation to the man who shows the 
ability to plan a new enterprise and, what is vastly more impor- 
tant, to make it actually succeed, will do a great deal to expand 
the opportunities for those of us who do not possess that kind 
of ability. The more such men we can develop in our midst, 



766 PRINCIPLES OF NATIONAL ECONOMY 

the more our industries will expand and the more opportunities 
for remunerative employment there will be for the rest of us. 

Poverty easily curable under freedom. We need not have 
poverty in our midst a generation longer than we want it. By 
setting to work deliberately to balance up our population, mak- 
ing ignorance and lack of skill to disappear, and making tech- 
nical training and constructive talent to increase, we can, in a 
short space of time, make low wages and poverty a thing of the 
past. What is even better, we can do this and still leave every- 
one a free man. This is the gospel of the new, or constructive, 
liberalism which is destined to bring relief — if not to this na- 
tion, at least to some nation which has the wisdom to adopt it — 
and which, when adopted, will keep that nation in the position 
of leadership among all the nations of the earth. 

A LIBERALIST'S PROGRAM FOR THE COMPLETE ABOLITION OF 

POVERTY 1 

I. Legislative Program 

A. For the redistribution of unearned wealth 

1. By increased taxation of land values 

2. By a graduated inheritance tax 

3. By control of monopoly prices 

B. For the redistribution of human talent 

1. By increasing the supply of the higher, or scarcer, forms of talent 

(a) By vocational education, especially for the training of busi- 

ness men 

(b) By cutting off incomes which support capable men in idle- 

ness 

2. By decreasing the supply of the lower, or more abundant, forms 

of labor power 

(a) By the restriction of immigration 

(b) By the restriction of marriage 

(i) By the elimination of defectives 

(2) By the requirement of a minimum standard income 

(c) By a minimum-wage law 

(d) By fixing building standards for dwellings 

1 Compare the author's work entitled "Essays in Social Justice," chap. xiv. 
Harvard University Press, 1915. 



CONSTRUCTIVE LIBERALISM 767 

C. For the increase of material equipment 

I. By increasing the available supply of land through reclamation 
(fl) Of "cut-over" land 

(b) Of stony land 

(c) Of swamp land 

(d) Of arid land 

II. NONLEGISLATIVE PROGRAM 

A. For raising the standard of living among the laboring classes 

1. The educator as the rationalizer of standards 

2. Thrift and the standard of living 

3. Industrial cooperation as a means of business and social education 

B. For creating sound pubhc opinion and moral standards among the 

capable ; for example : 

1. The ambition of the family -builder 

2. The idea that leisure is disgraceful 

3. The idea that the productive Hfe is the religious and moral life 

4. The idea that wealth is tools rather than a means of gratification 

5. The idea that the possession of wealth confers no Hcense for luxury 

or leisure 

6. The idea that government is a means, not an end 

7. Professional standards among business men 

C. For discouraging vicious and demoralizing developments of pubhc 

opinion ; for example : 

1. The cult of incompetence and self-pity 

2. The gospel of covetousness or the jealousy of success 

3. The idea that the capitalization of verbosity is constructive 

business 

COLLATERAL READING 
On Socialism 

Brasol, Boris. Socialism versus Civilization. New York. 1920. (A frankly 
hostile criticism by one who saw much of European socialism from the inside.) 

Ely, Richard T. French and German Socialism. New York, 1911. 
(Excellent for its historical and biographical material.) 

LeRossigxol, J. E. Orthodox Socialism. New York, 1907. (Probably 
the best critical review of the leading doctrines of Karl Marx.) 

Rae, John. Contemporary Socialism. London, 1S91. (Probably the fullest 
single account of modern socialist movements.) 

Skelton, O. D. Socialism. Boston, 1911. (An excellent critical exam- 
ination of the theories and claims of socialism.) 



768 PRINCIPLES OF NATIONAL ECONOMY 

On Communism 

Hinds, W. A. American Communities. Chicago, 1908. (The most up- 
to-date account of American communistic experiments.) 

NoRDHOFF, Charles. The Communistic Societies of the United States. 
New York, 1875. (Somewhat out of date, but sympathetically written.) 

NoYES, J. H. History of American Socialisms. Philadelphia, 1870. (A sym- 
pathetic account by the founder of the Oneida Community.) 

On the Influence of Government 

Mill, John Stuart. Principles of Political Economy, Bk. V, chaps, viii, 
ix, X, and xi. New York, 1893. 

On Anarchism 

Stirner, Max (Johann Kaspar Schmidt). The Ego and his Own. Lon- 
don, 1 91 5. (The most thoroughgoing advocacy of the idea which Nietzsche 
made popular under the name of the superman.) 

Tolstoy, Leo. The Slavery of our Times. New York, 1900. (Emotional 
rather than analytical.) 

On the Single Tax 

Fillebrown, C. B. a Single Tax Catechism. Boston, 1913. 
George, Henry. Progress and Poverty. New York, 191 4. 



INDEX 



Acreage, wide, 249 

Adams, Henry C, 619, 623 

Advertising, 323 ; and salesmanship, 425 

Agriculture, scientific, 280; commercial, 
284 

Anarchism, and socialism, 723 ; emo- 
tional, 728 

Animals, power from, 180, 183, 308 

Antidumping argument for protection, 
449 

Bacheller, Irving, 70 note 

Bagehot, 74 

Balance-of-trade argument for protec- 
tion, 445 

Balanced nation, 258 

Ballot a check upon compulsion, 102 

Banana, the, 252 

Bank check, origin of, 398 

Bank of England, 403 

Bank notes, 403 

Bank of the United States, old, 404 

Banks, origin of, 395 ; elements of 
safety, 395 ; reserves, 396 ; essential 
work of, 397; national and state, 
407 

Bargaining, comparative advantages 
in, 506; collective, 508; group as 
unit for, 509 

Bastable, C. F., 652 

Boundaries, iii 

Brands and trade-marks, 424 

Brown, H. G., 466 note 

Buckle, Henry Thomas, 143, 252 noic 

Budgets, household, 613 

Bullock, C. J., 292 note 

Capable race, characteristics of a, 125 

Capital, definition bf, 159, 163, 189; 
how increased, 164; productivity of, 
201, 532; balanced, 259; migration 
of, 263; marginal productivity of, 
531; marginal productivity deter- 
mined by quantity, 534; reason for 
scarcity of, 537 

Capitalist and laborer, 196 

Carlyle, Thomas, 325 

Cattle trail, the Texas, 273 



Christian communism, early, 715 
Civilization, value of, 123; types of, 
228; pent-up versus expanding type, 

253 

Clay, Henry, 741 

Clearing house, the, 399 

Closed shop, 511 

Collective bargaining, 508; labor pro- 
gram, 690 

Colonizing, 226 

Comforts, 585 

Communism, meaning of, 713 ; and 
anarchism, 714; experiments in, 715; 
primitive Christian, 715; Spartan, 
716; in medieval monasteries, 716; 
on Mount Tabor, 716; results of, 
721 

Communistic societies, American, 718 

Competing power of a nation, 609 

Competition, 63, 64; fair, 120; inter- 
national, 611 

Compulsion, versus voluntary agree- 
ment, 69; dangers of, loi ; checked 
by ballot, 102; elimination of, 622;- 
occasional necessity for, 703 ; versus 
freedom, 713 

Confidence and economy, 77 

Conflict, of interests, 34; forms of, 59; 
necessitating control, 727 

Consumption, competitive, 68; luxuri- 
ous, 96; meaning of, 565; im- 
portance of, 566; ratio of, to 
production, 567 ; rational, versus 
lavish, 573; private, in war time, 
663 

Contract, 102; enforcement of, 81, 105 

Cooperation, a form of competition, 
65 ; where successful, 66 ; fields for, 

67 

Cooperative society, the, 222 

Corporation, the, 214; some weak- 
nesses of, 215 

Cost, 356; is disinclination, 357; op- 
portunity, 357; of production, 358; 
kinds of, 359; pain, 360; increasing, 
360 

Courage, 131 

Covetousness, 134 



769 



770 



PRINCIPLES OF NATIONAL ECONOMY 



Credit, and speed of circulation, 38 7; 
agricultural, 408 

Crime, definition of, 62 

Crises, financial, 427; theories of, 428 

Crops, location of best, 142 ; advan- 
tages of heavy-yielding, 250 

Cultivation, margin of, 517 

Currency, token, 373; credit, 381; an 
elastic, 407 

Date, the, 252 

Decencies, 585 

Demand and supply, 344; physiolog- 
ical basis of the law of, 347 

Dependableness, 128 

Desires, kinds of, 16; balanced, 17; 
satiability of, 18; determine human 
activity, 37; expansion of, 354 

Diminishing returns, law of, 281 ; and 
increasing cost, 361 ; from land, 
400 

Division of labor, definition of, 166; 
contemporaneous, 172; successive, 
172; territorial, 174; international, 
176; a problem of distribution, 487 

Division of product, great social prob- 
lem, 489 

Drainage of wet land, 232 ; in Hol- 
land, 232 

Dunbar, Charles F., 399 

Economic activities, methods of con- 
trol of, 72 

Economics, branches of, 2 

Economizing space, 245 

Economy, importance of study of, 3 ; 
meaning of, s ; necessity for, 6 ; and 
confidence, 77 

Effort, irksomeness of, 356 

Ely, Richard T., 299 

Energy, solar, 184 

Environment, importance of, 141 

Exchange, 13 ; domestic and foreign, 
401 ; advantages of free, 443 

Extractive industries, instability of, 277 

Farm Loan system. Federal, 412 
Farming, dry, 235; "two-story," 246; 

intensive, 246 
Federal Reserve system, 400, 405 
Fidelity, 132 
Fish culture, 289 
Fisher, Irving, 388 
Fishing, 270 
Forestry, 288 
Forethought, 127 
Free trade versus protection, 444 



Freedom, of speech, 744; for self- 
indulgence, 746; versus compulsion, 
750; replaced by compulsion in war 
time, 752; dangers of, 753; of con- 
tract, advantages and disadvantages, 
754 

George, Henry, 732 

Gold prices, stability of, 368 

Goods, economic, 39; different classes 

of consumers', 584 
Government, 325 
Grazing, 271 ; in the West, 271 ; on the 

Great Plains, 273 
Gresham's law, 385 

Hadley, A. T., 303 note 

Harmony, 34; of human interests, 84 

Heredity and training, 138 

Hinds, W. A., 718 note 

Home-market argument for protec- 
tion, 446 

Homestead Act (1862), 239 

Honesty, 130 

Household management and national 
economy, 9 

Humboldt, 252 

Hunting, 267 

Huntington, Ellsworth, 145, 430 

Immigration, effect on standard of 
living, 503; restriction of, 757 

Income and expenditure, public, 11 

Industrial depression, 428 

Industrial Revolution, 291 

Industries, primary, 50, 267; second- 
ary, 50; the indoor, 228, 252; in- 
stability of extractive, 277; genetic, 
278; "productive," 460 

Infant-industries argument for pro- 
tection, 447 

Interest, meaning of, 526; distin- 
guished from rent, 527; distin- 
guished from profits, 528; relation 
to value and price, 544; functional 
theory of, 544 

Irrigation, 236 

James, William, 137 
Jevons, William Stanley, 430 
Johnson, John, 107 
Jones, Edward D., 429 

Kipling, 144 

Labor, definition of, 158; organiza- 
tion of, 177; coordinating, 197; 



INDEX 



771 



productive and unproductive, 326; 
contributes to national prosperity, 
331; price of, 484; storehouse of, 
5Qo; programs, classification of, 679 

Laborer and capitalist, 196 

Laissez-faire, defined, 740 

Land, 157, 162; scarcity of, 109; 
definition of, 159; mineral, 163; 
legal meaning, 226; waste, 229; 
stony, 230; dry, 234; acid and 
alkali, 238; noneconomic properties 
of, 241 ; economic properties of, 
242; desirability of, 516; different 
grades of, 519; differences in pro- 
ductivity of, 520; value to com- 
munity, 522 

Laws, need for, 74; sumptuary, 598, 
606 

Leisure class, 90 

Liability, limited, 215 

Liberalism, 750; and socialism, 751 

Location, importance of, 154 

Lumbering, 274 

Luxuries, 587 

McCulloch, J. R., 589, 651 

Machinery, farm, 147, 182 ; advan- 
tages of, 170; competition with, 
171 

Malthus, 501 

Man power, conservation of, 571; in 
war time, 669 

Marginal product, 475 

Market, first law of, 345 

Marketing, as a social function, 318; 
essentials of successful, 416; farm 
products, 417; cooperative, 418 

Marriage, age of, 139 

Marshall, Alfred, 292, 456 note, 586, 
631 note 

Marx, Karl, 699 

Mead, Elwood, 237 note 

Metals, precious, 368 

Middleman as a timesaver, 316 

Military-defense argument for protec- 
tion, 451 

Mill, John Stuart, 328, 589, 655 

Mining, 276 

Miser and spendthrift, 574 

Mitchell, W. C, 380 note 

Monasteries, communistic organization 
of, 716 

Money, one form of social capital, 
191; a labor-saving invention, 364; 
substitutes for, 365 ; qualities in ma- 
terial of, 367 ; kinds of, in United 
States, 370; standard, 372, 375; 



fiat, 380; quantity theory of value, 
385 ; speed of circulation, 38() ; 
speeding up circulation of, in war 
time, 662 ; circulation of, in war 
time, 673 

Monopoly, 363 

Morality, teaching of, 88; different 
views of, 725 

Motives, transitory, 15 

Mule, the, 182 

National banking system, 405 
National prosperity, helps to, 160 
Necessaries, 584 
"Niggardhness of nature," 354 
Noncompeting groups, 503 

Obedience to law, 134 
Occupation, influence of, 284 
Overinvestment theory of crises, 435 
Overproduction theory of crises, 428 
Ox, displacement of, 181 ; historical 
importance of, 183 

Paper money, redemption of, 377; 

purchasing power affected by cus- 
tom, 380; purchasing power affected 

by quantity, 381 
Partnership, 213 
Patriotism, 729 

Periodicity theory of crises, 429 
Peschel, 144 
Physiocrats, 731 
Plav, 47; distinguished from work, 

358 
Population, balanced, 261 ; law of, 

SOI 
Possession, priority of, in 
Poverty, and socialism, 706; abolition 

of, 766 
Power, animal, 180, 183, 308; kinds 

of, 188; mechanical, 309; man, 571, 

669 
Prices, control of, 221; fluctuations 

in, 436 
Production, necessity of economizing 

means of, 45 ; lengthening process 

of, 172, 199; combination of factors 

of, 199; balanced agents of, 257; 

importance of any factor of, 492 
Productivity, promotion of, 76; great 

law of, 282 ; marginal and average, 

477; relative. 489 
Profits, distinguished from interest, 

528; meaning of, 551; functional 

theory of, 552 
Progress, meaning of, 575 



772 



PRINCIPLES OF NATIONAL ECONOMY 



Property, follows freedom from vio- 
lence, 103 ; a by-product of freedom, 
106; ways of acquiring, 106; de- 
velopment of idea of, 107; kinds 
of, 114 

Property rights, versus human rights, 
113; limitation of, 116 

Protection, six popular arguments for, 

444 
Protective tariff, some possibilities of, 
453 ; paid by consumer, 453 ; paid 
by foreign producer, 454; prohibi- 
tive, 455; and wages, 457; and less 
productive industries, 460 

Quantity theory of money value, 

Railways, 310; short-distance and 
long-distance hauling, 242 ; public or 
private, 310; monopolistic character 
of, 311 

Real-estate boom, 434 

Reasonableness, 132 

Reclamation, 229 

Reconstruction programs, 713 

Reformers, two classes of, 710 

Religion, 144 

Rent, meaning of, 515; and diminish- 
ing returns, 521; law of, 523; 
determines selling price, 523; dis- 
tinguished from interest, 527 

Residual share, 559 

Revenues, classification of, 619; char- 
acteristics of good system of, 623 

Ricardo, David, 732 

Risk, necessity of, 553 ; irksomeness 
of, 553 

Roads, 188 

Robinson, Edward Van Dyke, 263 
note, 567 

Ross, E. A., 78, 628, 658 note 

Rothamsted experiments, 479 

Savings banks, 397 

Scarcity, meaning of, 43, 349; causes 

of, 354; of labor, causes of, 497 
Scientific management, 261 
Seignorage, 376 
Self-interest, definition of, 21; and 

public uses, 33 
Seligman, E. R. A., 631 note, 635 

note, 659 note 
Services, professional and personal, 51 ; 

philanthropic, 55; nonphilanthropic, 
.56 
Silver standard, 377 



Single tax, meaning of, 731 ; as an 
engine of social reform, 732 ; four 
arguments for, 737 

Smith, Adam, 85, 166, 167, 178, 326, 
585, 627, 732 

Smith, J. Russell, 246 

Sobriety, 130 

Social income, distribution of, 13; 
utilization of, 14 

Socialism, classification of, 697; an 
authoritarian program, 697 ; defini- 
tion of, 698; distinguished from 
populism, 699; distinguished from 
liberalism, 700; an exclusive term, 
704; criticism of, 705 

Society, stratification of, 218 

Spartan communism, 716 

Specie payments, suspension of, 378 

Spencer, Herbert, 724 

Sprague, O. M. W., 399 

Standard of living, 499, 572 ; affects 
price of labor, 500; competitive, 
608; and a high birth rate, 763 

Standardization, 321; and economy, 
79; as a government function, 420; 
for quantity, 421; for quality, 421; 
in the marketing process, 423 

Standard-of-living argument for pro- 
tection, 448 

Steam engine, 187 

Storing goods, 319 

Strike, the, 512 

Struggle for existence, 59 

Swamps in the United States, 233 

Taborites, 716 

Taussig, F. W., 172 note 

Tax, definition of, 620; inheritance, 
625; incidence of a, 630; single, 731 

Taxation, indirect, 621; and monopoly 
price, 621 ; double, 623 ; graduated 
or progressive, 626; canons of, 627; 
repressive, 628; minimum sacrifice 
theory of, 645; faculty theory of, 
649 ; socialist theory of, 650 ; utili- 
tarian test of, 65s; as sound war 
finance, 664; five fallacious objec- 
tions to war-time, 670 

Teachableness, 133 

Temperate zones, advantages of, 141 

Thrift, 127; meaning of, 203; effects 
of, 204; and overproduction, 205; 
argument for, 210; in a balancing- 
up labor program, 689; and the 
laborer, 765 

Tides, power from, 186 

Tillage, 280 



INDEX 



773 



Time, importance of, 154 

Tools, 157; compared with machinerj', 

169; compared with consumers' 

goods, 194; as consumers' goods, 578 
Transportation, cheapening, 242 ; water, 

305 ; types in use, 307 
Trust, the, 220; superior bargaining 

power of, 418 
Trust companies, 398 

Unions, trade, 509; industrial, 509; 
labor, 510; federation of trade, 510 

United States, geographical advan- 
tages of, 14S 

Utilities, nonmarketable, 81 

UtiHty, 153; personal, 315; form, 318; 
time, 319; total, 340; marginal, 340; 
diminishing, 351 

Utopias, 714 

Valuation, and exchange, 335 ; of goods 
and services, 471; of consumers' 
goods, 685 

Value, dependent on desirability and 
scarcity, 42; and esteem, 337; and 
price, 338; economic, 339; func- 
tional theory of, 341 ; determined 
by scarcity, 343 ; relation of utility 
to, 348; social, 350; of a man, 569; 
physical basis of, 681 ; location and 
fertility, 734 



Variable proportions, law of, 473 

Veblen, Thorstein, 99 

Vice, as waste of energy, 95 ; control 
of, is sumptuary legislation, 599; as 
a selective agent, 601 

Violence, repression of, 103 

Voluntary agreement, versus compul- 
sion, 69; and inheritance, 118 



Wages, functional theory of, 484; 

causes of differences in different 

occupations, 494 
Walpole, 292 
War, financing a, 661 ; financing by 

taxation, 664; financing by loans, 

667 
Waste of man power, 87 
Wealth, ways of acquiring, 4, 48; two 

meanings of, 40 ; and well-being, 41 ; 

ten characteristics of, 46; right of 

men to accumulate, 92 
Well-being, social, 12 
Wheels, 308 

Winds, power from, 186 
Work, attitude toward, 52; distin- 
guished from play, 358; joy in, 

577; pride in, 580 



Xenophon, 11 



ANNOUNCEMENTS 



PRINCIPLES OF POLITICAL 
ECONOMY 

By Thomas Nixon Carver, Professor of Political Economy ia 
Harvard University 

j2mo, cloth, ix + 5SS pages 

A NONTECHNICAL discussion of the problems of nation-building 
designed by its scope and style to interest the general reader, and 
fitted by its arrangement for classroom use. At no period in the his- 
tory of democracy have men been compelled to think so seriously on 
the question of the strength of democratic nations as at present, nor 
has it ever been so apparent that national strength is largely economic. 
This book examines the economic foundations of our national strength 
and points out some of the more direct methods of improvement. 

The discussion is aimed at the plain average citizen and at the student 
who will be the average citizen of the coming years, since the people 
themselves must understand the economic principles upon which 
national greatness depends. The book is particularly recommended 
for high-school seniors and for students beginning the study in college. 

SOCIOLOGY AND SOCIAL PROGRESS 

A HANDBOOK FOR STUDENTS OF SOCIOLOGY 

By Thomas Nixon Carver, Professor of Political Economy in 
Harvard University 

Svo, cloth, Sio pages 

Extracts from the more significant writings on social problems 
of the last two centuries, classified and arranged in logical sequence 
tQ give a systematic view of the subject. Although designed prima- 
rily for juniors and seniors in our colleges and universities the general 
reader will find it most readable. It may be used as a textbook, as 
the basis of a course in sociology, or as a companion volume to one 
of the various textbooks already in use. 



GINN AND COMPANY Publishers 



BOOKS IN POLITICAL SCIENCE 

Allen : Civics and Health 
Bullock : Selected Readings in Economics 

Bullock: Selected Readings in Public Finance (Second Edition) 
Carver : Elementary Economics 
Carver : Pi-inciples of National Economy 
Carver : Principles of Political Economy 
Carver : Principles of Rural Economics 
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Carver : Sociology and Social Progress 

Commons: Trade Unionism and Labor Problems (Second Series) 
Davis : Immigration and Americanization 
Dealey : Growth of American State Constitutions 
Gettell : Introduction to Political Science 
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Gregg : Handbook of Parliamentary Law 
Hayes : British Social Politics 
Johnson: Money and Currency (Revised Edition) 
Keller: Colonization 

Kimball : National Government of the United States 
Morse : Civilization and the World War 
Orth : Readings on the Relation of Government to Property and 

Industry 
Reinsch : Readings on American Federal Government 
Reinsch : Readings on American State Government 
Ripley : Railway Problems (Revised Edition) 
Ripley : Trusts, Pools, and Corporations (Revised Edition) 
Sumner : Folkways / / 

Taussig: Selected Readings in International Trade and Tariff 

Problems 
Ward: Applied Sociology 
Ward : The Psychic Factors of Civilization 
White: Money and Banking (Fifth Edition. Revised to 1914) 
Wilson : The Hague Arbitratio'n Cases 
Wolfe : Readings in Social Problems 



191 

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